Every few months watchdogs proffer a new financial product as “the next subprime crisis” waiting to happen. Auto loans, student debt and energy junk bonds have all held the title in recent years. Now, behold the PACE loan.
The “fastest-growing” loan type in America, PACE loans provide a government backstop to homeowners hoping to finance energy-conscious renovations, like insulated windows or solar panels. You won't get these from your typical mortgage broker, though. Instead, it's handymen and home contractors who are hawking PACE loans. What could go wrong?
Apparently, everything. The Wall Street Journal explains:
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.
Before you go out and spend your life savings on colloidal silver and emergency grain supplies, however, it's worth putting PACE in context. So far, just $3.4 billion in PACE loans have beens issued since the program began in 2007. At their height, subprime home loans totaled more than $1 trillion.
But demand is hot. Private equity firms and mutual funds are spoiling to get into the action, and apparently it's not too hard to graduate from plumber to mortgage broker under the program.
Michael Gardner, who runs Mediterranean Heating & Air Conditioning […] says he has been recommending loans for about two years and got “an hour or two” of online training from Renovate America.
The program “is real nice because there are no FICO score requirements or anything like that,” says Mr. Gardner.
That's comforting to know.