Right Hooks

A Housing Crash Redux?

Those who don't learn from history are doomed to repeat it.

Jordan Candler · Jan. 10, 2017

Among the many steps the Trump administration can take is to immediately reverse course on a disastrous new housing policy that resembles the decade-old industry crash. The Wall Street Journal is sounding the alarm on “a booming corner of the lending industry called Property Assessed Clean Energy, or PACE. Such loans, set up by local governments across the U.S., are designed to encourage homeowners to buy energy-efficient solar panels, window insulation and air-conditioning units.”

Here’s the broader problem, explained by WSJ: “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… 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.”

The Journal goes on to say, “Investors like the bonds’ relatively high payouts, environmentally friendly reputation and lofty credit ratings. On the other hand, rating firms have said there aren’t enough historical data on PACE loans to forecast potential defaults. Some local governments that embraced the loans as a way to bring clean energy to the masses didn’t anticipate the messy consequences.”

Numerous states are now scurrying to enact regulations to prevent defaults, fraud and deception marketing. More worrisome, “The industry could get a new growth spurt from a July decision by the Department of Housing and Urban Development to allow the Federal Housing Administration to purchase mortgages on homes with PACE loans.”

Like the subprime mortgage debacle, the biggest problem here is that most people have no idea what they’re getting themselves into. Only later do they find out they don’t have the money. Theoretically, says the Journal, “That setup puts local governments in the awkward position of potentially foreclosing on their constituents. If that happens and the house turns out to be worth less than the amount owed by the homeowner, other taxpayers could be stuck with a loss on the difference.”

This scheme works well for a while, particularly for those private entities promoting it, but it risks creating a massive bubble that will eventually burst. The question then becomes: Will its most ardent advocates argue it was worth it because it promoted “green” initiatives? Those who don’t learn from history are doomed to repeat it.

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