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The Next Subprime Crisis Could Be Green

Subprime mortgages brought the global economy to a grinding halt in 2008, but eight years later it’s not clear that policymakers have learned many lessons from that crisis. This time, instead of mortgages being given out like candy, it’s a government backed program called Property Assessed Clean Energy (or PACE for short) that was drawn up with the intention of incentivizing Americans to renovate their homes to make them more energy efficient. The goal—more energy efficient homes—is a sensible one; boosting energy efficiency is one of the few low hanging fruits left on the environmental policy tree. But this federal program has been loaning out billions of dollars with apparently little oversight, and the Wall Street Journal is drawing parallels:

About $3.4 billion has been lent so far for residential projects, and industry executives predict the total will double within the next year. That would likely rank PACE loans as the fastest-growing type of financing in the U.S.

As the loans spread, so do problems that echo the subprime mortgage crisis. Plumbers and repairmen essentially function as loan brokers but have scant training and oversight. They often pitch PACE loans to help land contracting jobs and earn referral fees from lenders, according to loan documents and more than two dozen borrowers, industry executives and employees.

Creditworthiness matters little to lenders, because loans are based on the value of a homeowner’s property. PACE loans typically require no down payment, and the debt is added to property-tax bills as an assessment.

It’s worth taking the time to read the WSJ‘s full account of these loans, and the similarities their recent proliferation bears to the subprime mortgage crisis. And while you’re at it, see if you can get through the whole thing without feeling a shiver go down your spine.

Investors are being attracted to these loans like moths to a flame, but there’s a growing concern that the default rate—reported to be currently less than 1 percent—could grow as unqualified homeowners are suckered into participating in the program.

Big green programs always have some laudable goal at their heart, but so often we see their rollout plagued by mismanagement, by strategic miscalculations, and, as it looks to be the case with PACE, a lack of strong regulatory oversight.

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  • Disappeared4x

    Add PACE to however much is in what may be called FHA equity-in-place renovation mortgages. Add the need for regulatory standards for residential appraisals.

    There are other distortions in what is a new price bubble, with much aging stock in need of renovation to maintain value, in locations where there is no more equity-in-place for a re-fi.

  • Pait

    This looks like a fishing expedition for a problem that only exists in imagination. Having failed signally to understand the crashes of 2008 and the previous, smaller crash of the Nasdaq – both following bubbles that they applauded enthusiastically – some people now look for crashes everywhere. Well, everywhere that is ideologically convenient – education and green energy for example.

    The reason the comparison is outright idiotic should be clear: the real estate bubble was enormous – so defaults were contagious to each other and had a domino effect on the economy as a whole. Green home renovations are peanuts. Homeowners will not go bankrupt in large numbers because they borrowed too much for a renovation, they way they did when they borrowed too much for a house. And one renovator’s default won’t cause the neighbors to default on their renovations, as happened with subprimes. Even if they do, it’s a tiny sector that won’t drag the economy down and cause more defaults.

  • Andrew Allison

    The sub-prime auto lending bubble, where the anticipated default rate is already almost 9% and rising fast, will pop first. WRT to the PACE issue, it’s even more dangerous for consumers than it appears. In addition to the additional property tax burden, the loan represents a lien on the property which is superior to to mortgage liens. Although the lien is transferable upon sale, a prospective buyer might have trouble finding a mortgage lender willing to subordinate.

    • Jim__L

      I agree with Pait, $3B isn’t all that much in the grand scheme of things.

      The
      reduced scope of the problem could mean a different scale of solution
      can be made to work. I propose a “Green Homeowner Loan Bailout Fund” —
      a fund that would help by agreeing to take on these liens should the homeowner get into trouble financially.

      If a major Green donor (the state of California, maybe, though I’d vastly prefer private investment) could be persuaded to back this fund, it would solve the problem you cite.

      • Andrew Allison

        California already has such a fund. But rather than backstopping the program with taxpayer funds, wouldn’t it make more sense to have the sellers and installers of these systems make the judgement as to whether the client is creditworthy? That way, the desire to sell would be tempered by the ability to repay.

        • Jim__L

          That would increase transaction costs by dumping onto contractors the responsibility (an related costs) for making those calls. That’s not their core competency.

          And you have to admit, one thing that the mortgage meltdown (as well as the ballooning costs of education) has taught us, is that consumers are a whole lot less savvy over the long term than they are over the short term.

          That leaves us with the people who have the actual money — the lenders — being the ones with the biggest interest in making sure that the borrowers can repay. Allowing these debts to be discharged in bankruptcy, or making these debts take second place behind mortgage-holders in a forced sale, would give these lenders a very good incentive to withhold funds in risky cases.

          But, if people who want this to happen are willing to freely donate their money to ameliorate the potential negative impacts of this idea, I think they should be encouraged to do so. Getting them back into the habit of personal philanthropy rather than encouraging raids on the public treasury, would be an absolutely wonderful trend in our society.

          • Andrew Allison

            Don’t you think that the contractors need an incentive not to push sales to people who can’t afford them? Your argument that consumers are a lot less savvy over the long term is yet another reason to make the seller shoulder the risk. As the PACE legislation is written, the loans are senior to other debt. What you are suggesting would require new legislation, and would not help. At the risk of being repetitious, the problem is that sellers are pushing products which at least some of the buyers can’t afford. The best way to prevent this is to make the sellers bear the the risk of default.

          • Jim__L

            I think that contractors are not in a good position to know whether the people they’re selling to can’t afford what they’re buying, unlike the financiers who loan the money.

            We’ll get more accurate results if the banks are the ones that have to say “no”.

          • Andrew Allison

            With respect, I think you are missing the point. Because the loans are a senior lien upon the property, the PACE lender has security. The issue here is that the loans are being pushed to people who can’t afford them by unscrupulous contractors and the taxpayer is on the hook for any defaults. Your plan would only work if the loans were subordinate to mortgages — at which point the favorable interest rate would go away and loans become much harder to come by.

          • Jim__L

            I appreciate the details you’re providing, but I’m not sure they work against my point. Putting these loans subordinate to mortgages sounds good to me, as does making these loans much harder to come by.

            That is ultimately the only way to keep bubbles from forming — making the loans harder to come by. It’s a feature, not a bug.

  • QET

    Plumbers and repairmen essentially function as loan brokers but have scant training and oversight.

    Yeah, all that training and oversight that prevented the mortgage scandal, and that is about to not prevent the student loan scandal. When even the WSJ falls for the “licensing and training” fraud, then we know we’re in trouble.

    And why shouldn’t plumbers and repairmen–you know, the little guy, Main Street, the working class, workingmen–be able to get in on the action, be able to squirt some of that milk from the federal teat into their own mouths for once? Seems to me like we ought to continue this program for a long time. It will help reduce “inequality” and encourage more kids to become plumbers and repairmen and stay away from “college.”

  • victoria wilson – mn

    I’ve been trying to arrange my thoughts on this issue as I believe the PACE people are going to make a run at our fair state this coming year. In my view the reasons this scenario sets up an environment for corruption (or breaking the intended rules for self benefit) are:
    1. public liens take a priority against real property- allowing traditional/single interest business to benefit from this lien position exerts above market pressure for business to do use this system.
    2. public liens are given a priority position as a whole a group of owners is usually involved, after lengthy evaluation, in their approval and administration- think how long it takes for road resurfacing to be proposed, discussed and approved. In this scenario one owner authorizes the project and perhaps a staff person who is not necessarily even a resident of the neighborhood.
    3. due to the lack of evaluation of the projects, there is little advice or oversight as to what is considered a worthwhile environmental improvement from a market value standpoint. This check is usually performed by the bankers who protect their interest by denying projects where disbursal of funds do not enhance or protect property value.

    To recap, PACE loans use of public lien and billing structure promotes business corruption, or breaking the rules, in #1 by added incentive with a stronger than market lien position; in #2, by reducing the consumer evaluation or discussion regarding the benefits of the goods being offered; and in #3, by removing the catch person (underwriter) who denies over-borrowing against a property.

    The PACE folks however are making headway with public administrators who hear only the catch phrases of environmental improvements, the intended objective of all projects from windows to solar panels. Dangling the ‘common good’ out in front of decision makers in the public arena is as attention getting as ”$$’ in the traditional marketplace.

  • Robert Wagner

    There is no real “science” behind this nonsense. The money and loans should be spent on funding real science about real problems.

    How to Discuss Global Warming with a “Climate Alarmist.” Scientific Talking Points to Win the Debate.
    https://co2islife.wordpress.com/2017/01/03/how-to-discuss-global-warming-with-a-liberal-the-smoking-gun-files/

  • Robert Wagner

    This article predicted the green economic collapse a few years ago:

    Will The ‘Green Economy’ Trigger The Next Global Financial Crisis?
    http://seekingalpha.com/article/2093263-will-the-green-economy-trigger-the-next-global-financial-crisis

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