HERO Program

The HERO Program is an energy efficient financing program in the United States. The name HERO stands for Home Energy Renovation Opportunity. The HERO Program is a Property Assessed Clean Energy (PACE) Program, which provides financing for energy-efficient, water-efficient and renewable energy products to home and business owners in approved communities within California. The financing provided by the HERO Program is repaid through annual property tax payments, which are delivered and collected by the County and can be passed on to a new property owner if the property is sold.

History

Renovate America developed the HERO Program in 2010 through a partnership with the Western Riverside Council of Governments (WRCOG), a public agency representing 18 communities within Riverside County. Western Riverside County became the first region to offer the HERO Program to its constituents. In February 2014, the HERO Program was accessible to almost 70% of Californians.

As of July 2014, the HERO program has created 2,400 new jobs in the construction sector and has $250 million in funded projects on 12,500 homes in California.

How it Works

Homeowners who meet the minimum criteria are eligible for financing through the HERO Program. Once a homeowner or commercial property owner is eligible for HERO Program financing, HERO finances 100% of the cost to purchase and install eligible energy saving products. The repayment of the financing is included in the property tax bills delivered by the residing County. Property tax payments that are made through an impound escrow account will be adjusted on the monthly payment by the lender. Similar to a mortgage, the interest paid on the principal balance is tax deductible. Should a property be sold before the financing is repaid, the remaining payments can be passed onto the new owner PACE Financing.

PACE stands for Property Assessed Clean Energy. It refers to a type of financing that allows Property Owners to borrow money to install energy efficiency improvements on their property via special assessments on their property taxes lasting up to 20 years. Approvals are based on the homeowners having at least 10% equity in their home, being current with property taxes and mortgage payments, not having filed for bankruptcy, and other requirements. If the property is sold or transferred, in most cases the property tax assessments remain tied to the property. However, this process depends on the transfer restrictions established by the buyer’s lender. In order for a PACE Program to become available in a City or County, PACE legislation must be in place on the State or Federal level.

Concerns

The protections put in place by many PACE programs to protect borrowers and existing mortgage holders may result in origination fees between 2-3%. For example, a 1% fee is often charged to cover a third-party engineering review.

Several problems have been raised regarding residential PACE, but commercial PACE is far less controversial. In July 2010, the Federal Housing Finance Agency (FHFA) along with Fannie Mae and Freddie Mac objected to the senior lien status that residential PACE financing shares with other property taxes and assessments and took steps to stop residential PACE. The Agency issued a statement advising Fannie Mae and Freddie Mac to avoid buying mortgages with PACE assessments and hinted at more drastic actions, such as finding PACE homeowners in default under their mortgages. These actions stalled the development of residential PACE programs. Despite these concerns, residential programs continued to develop and began to gain traction in 2012-2013[1].

Part of the problem with PACE in residential is that priority lienholders are not notified nor given an opportunity to object to this financing. Unlike residential properties, in Commercial properties priority lien holders are notified and given an opportunity to object, therefore Commercial PACE has been less affected. There are 25+ active commercial PACE Programs in 10 states and the District of Columbia. Sixteen programs have funded commercial PACE projects. Commercial PACE market is growing and evolving.

Other problems regarding PACE type programs are that these are financing programs secured with Real Estate where lenders do not follow the same type of regulations than traditional lenders securing real estate must follow, therefore there is a concern that borrowers are not properly informed of the implications of obtaining this financing.

It has been reported that many PACE loans have been sold to borrowers under the false statement that such financing will be paid with the existing tax assessment. In reality, once the financing has been obtained the assessment on the property taxes will increase according to the terms and size of the financing obtained.

Another reported problem is that property owners obtain this financing and then sell the house without disclosing this increase in the property tax liability and in fact, if the buyer is to do a search of the recorders office and the tax assessor, there is a possibility that if the financing was obtained recently it will not appear with the recorder nor the assessor, this is because the PACE financing is added to the property tax bill and such bill is not updated on a regular basis, it is only updated a couple of months before the property tax bill is prepared. There have even been cases where the lender has foreclosed on the property, without knowing about the PACE financing, and a third party buyer buys the property at the foreclosure auction only to find out later when the buyer receives the next property tax bill that PACE financing had been obtained.