HERO (Home Energy Renovation Opportunity) is a PACE (Property Assessed Clean Energy) program that allows homeowners to finance energy-efficient and water-saving home upgrades, with payments made through their property tax bill. The government is aggressively marketing this program to homeowners, and real estate professionals to sell the program to their buyers and sellers. In fact I recently received the attached letter. It’s a great program, but with major potential future issues that the government doesn’t disclose, or most consumers and real estate professionals realize.
The upside is HERO provides financing for eligible energy efficient, water efficient, and renewable energy products. HERO finances 100% of the cost to purchase and install eligible products. HERO offers low, fixed interest rates with amortization periods of 5, 10, 15, or 20 years and, unlike other financing options, there are no credit score requirements and repayments are made through property taxes, with the interest being tax deductible.
Downside, this is a impounded loan only paid through the property tax bill.
• Technically, the HERO loan is recorded against the property as a tax lien.
• The tax lien is in the first position, meaning that if a homeowner goes into default, HERO gets paid before any other creditors, including the lenders that hold the mortgage. A major issue to mortgage lenders.
• That first position is so important that the Federal Housing Finance Agency prohibits Fannie Mae and Freddie Mac from purchasing mortgages or notes with PACE liens. The FHFA statement pointed out the risk this first-lien status poses to taxpayers, real estate agents, banks and homeowners about the marketability of a house.
What this means is if you’re going to sell the house, the theory is because the money was applied to improve the property, the buyer of the property will be willing to accept the additional “loan payment” through their property tax bill. Reality, in most cases the loan will need to be paid off at the point of sale.
The HERO may be able to be subordinated to the new a first “purchase” loan (i.e. HERO re-recorded to put it back in second position). But the combined loan to value adding the HERO on top of the new loan will limit the loan programs, increase the cost of the new loan, and may increase the income ratios of the house payment where the buyer may not qualify.
This is also an issue if the present owner wants to refinance. A subordination of the HERO will still limit financing choices. As a minimum it can make the CLTV (combined loan to value) a potential issue with the new lender.
Even if you excluded Freddie and Fannie financing, there are lenders that can work with the HERO scenario, but there will be limitations, and the pricing of the loan will probably be higher.
If selling the property, it’s always best to eliminate, or at least know how you’re going to approach these types of issues before putting the property on the market. Eliminating a percentage of the potential buyer base is never productive, regardless of the cause.
If you are in the Los Angeles area, have any questions or real estate sales or financing needs, feel free in contacting me.
Ron Henderson GRI, RECS, CIAS
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth