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.