The Purpose of the PACE Program With Paul Herrera #593

Paul Herrera

Aaron and Bruce Norris are joined again this week by Paul Herrera. Paul is the Government Affairs Director for the Inland Valley Association of Realtors. Paul serves as an advocate for realtors on local issues, helping to preserve and protect property rights and the value of homeownership. His unique experience includes an award-winning journalism career with newspapers in Florida and California. He covered real estate, small business, the aviation business, and the confluence of government policy, politics and business.

Episode Highlights

  • What is the main issue behind affordable housing, and does it extend to the renting side?
  • What are some ideas where it would be possible to build a different price-level home?
  • What could we see happening with solar between now and the next few years?
  • What’s the one thing Bruce always asks the panel at every I Survived Real Estate?
  • What bill are they trying to pass that would benefit accessory dwelling units?
  • What is the PACE Program, and what does it stand for?
  • What will be critical in this election year?

Episode Notes

In the last segment, they had just touched on the affordable housing issue. Bruce asked if the problem is in the person who would purchase a property and cannot find something affordable. He wondered if it extends to the renting side where it become unbearable and somebody has to move to a cheaper area. Right now there is a problem with affordability across the board in that there are not enough homes, rental or to purchase. You can see the listing numbers when it comes to the ownership side, and on the rental side you can see the very low vacancy rates across the states and the increase in rents. These are two very strong indicators of what is happening.

If you look around the state, the problem manifests differently. He had just spent some time in Sacramento, and the number of people who are commuting from there to San Francisco is incredible. The realtors in the Sacramento area are now showing people from the Bay Area homes on a regular basis. He could not imagine this type of scenario prior. The commute, without traffic, is about an hour and fifteen minutes, which is almost Riverside to San Diego or Beaumont to Downtown Los Angeles every single day. This is what is happening now on a regular basis. Affordability is driving people in different directions, and if they can leave the state that is happening too. Affordable housing ownership would be preferable since it would be a more stable group. If somebody could get into an entry-level home, they would have equity and want to stay there.

Bruce asked what some ideas are where it would be possible to build a different price-level home. How would you do this jointly and get the team together to say it is feasible to do? Paul said this was a very difficult question, especially if you are talking about Sacramento. He started by asking what we would do if we could actually crack through all the various interests and entrench groups that are part of the discussion and seek a solution. He said you would find ways to make it profitable to build an entry-level home in California. Paul said it is just not possible right now, and there is no incentive to buy a piece of land and put up a 2 bedroom, 2 bathroom home as you would have two generations ago.

If you look at the homes in the Wood Streets of Riverside and the mix of working class streets versus larger lots, you will not find this in newer construction. The costs are way too high. You would need to roll back some of the restrictions to entitlements and roll back of some of the California Environmental Quality Act when it comes to housing. There must be some level of changes so you can build and be more confident that when you buy a piece of land that is properly zoned, you will be able to do so without challenges and restrictions. Aaron said it seems like they are adding. The California Energy Commission just came out saying that after 2020, you will have to include solar in all building projects regardless of size or price point. You wonder how this happened off the grid from the affordable housing conversation. Paul said they start by using the wrong numbers. They start by saying it would actually improve affordability, which is ridiculous if you break down the way people buy houses, the way energy works, and the way it will work in the future.

There is this pervasive attitude where people say the median home price is $150,000, what’s another $15,000? This seems to be a conversation people are willing to have when they are setting policy and it is not their money. They don’t necessarily look at what it takes for a young family or individual to get into a home in the first place. There has been a whole generation of people wondering what the big deal is about another $1,500 if they are buying cleaner air or being able to afford pensions. Some of these things are good since some regulation of land use is important. However, we have taken it to an extreme. We know this because we have seen the amount of cost that comes into California that we have not seen in other states. This includes some very good regulatory states.

Bruce said what is interesting to him about solar and why he does not have it on his own house is that it will progress rather quickly. Whatever you put in a year from now could be completely obsolete in three years. There could be a whole different way to do it, and you already have everything on your roof. Aaron said he did not mind having a conversation about solar since it is important. He grew up in the Inland Empire in the 80s and remembered third-stage smog alerts and would remember coming home and feeling like pins poking his throat. But in all honesty, utilities are having to change the way they charge consumers because everyone assumes they are a monopoly raising rates. This is not really the case. Solar companies are coming in and taking the source of income away. You still have to maintain the grid and maintain connections as well as pay for some very expensive pensions.

What they will start moving towards is a higher fixed cost. As a consumer, you will be paying less in the variable rate of actual usage. Buying solar ten years ago may have been a good deal, but in the next five years it could completely change how much it would cost. Paul said the reality is you are not paying for them to generate electricity. You are paying for them to deliver to your home. This includes the wire, infrastructure, the whole setup. This is the vast majority of the cost. If you have people who are no longer purchasing electricity since they are generating it at home, this is good for them. However, they still need the reliability, unless they are willing to unplug from the grid and have a battery in the garage. This is possible, but on the other hand it means anyone still connected to the grid still has to pay for it.

It is hard to imagine we don’t go from a system in which we pay for the amount of energy used to where we are paying to have energy. To make it even more political, there is a lot of conversation about solar being the rich man or woman’s option to stick it to government where it is only affordable to people who can pay for the system. Socioeconomically, challenged individuals would not have the option to get off the grid. Therefore, it is not equitable.

Paul said this is the same concern they have when it comes to raising gasoline costs and raising fuel costs. There is some value to that, and you can have a very robust debate about whether we should change the mix of ways in which we power our world. However, when you make these changes you make things more difficult for the working class. You cannot do this in a bubble, and this is what was frustrating about the decision a few weeks ago. It was not honest. How can you have the conversation about affordable housing at the same time when you are not even starting the solar conversation with honest data. Bruce said he would be very frustrated about this.

The Norris Group has an event every year at the Nixon Library called I Survived Real Estate. Bruce always asks the panel what one thing they want to add. Every year Bruce says the same thing that he would like every elected official not to act like a Republican or Democrat, but an American. This means both sides would be trying to come to the best solution, not their solution on their side. Paul sees this constantly in his position. The most frustrating part is not seeing real evidence, but rather “air quote” facts made up to suit an end goal. Rather, they should be asking the right questions and investigating the facts, then they can see where this takes them as far as an approach. This hardly ever happens; and it is frustrating as an onlooker, especially for politics. Each is thinking they have to get out of their own way somehow.

Bruce next went on to talk about the housing front again and asked if they had just raised some money through added fees for recording documents. This was directly connected to housing affordability and is where the money was going to go. Bruce asked about when it does go somewhere and what their plan is with that money. Paul said there is a law he supported that passed in the last cycle that imposed a $75 recording fee on up to three documents, $225 being the maximum. It is imposed on non-transactional documents. If you are buying or selling a house, it does not apply there. However, if you are refinancing your mortgage or changing title, you are paying a $75 fee per document. This should raise about $300 million statewide annually.

Paul said his team came around to a support position pretty reluctantly based on a couple changes. One was they wanted to make sure the money was spent where it was supposed to be spent. They asked that a quarter of it be spent on ownership housing. This includes down payment assistance, selling seconds, and other vehicles that can help people afford their first home. There is a commission to be part of it Paul will be sitting on to be a part of keeping oversight on how the money is used. The rest of the funds, rental assistance, Section 8 vouchers, and several other items help people with housing. You break it out into what programs you can use to help somebody who makes 50% of their incomes, around $30,000 a year, to afford a place to live. They are not going to buy anything, so they need rental assistance. When you look at people who are making 120% of their income, you are now getting into the ownership side or some other assistance depending on family size. This is where the money is designed to go, and they hope it will.

There is something new where you have a single-family home, and maybe now you can have a granny flat in the back. Bruce asked if this is across the board in California or isolated to certain counties. Paul said they have been advancing several stages of state law to help make that easier. There is a bill in the current legislature, although it seems to be stalling at the moment. This would really reduce some of the cost of building those units known as accessory dwelling units (ADUs). For the past couple years, it has become increasingly difficult for the governments to deny permits for the construction of ADUs.

With the bill being done this year, it would be illegal to impose impact fees, school fees, and water fees as if you were building a new home. Now you would not have any of those attached as long as you are building an ADU. They would also attach some penalties or changes so you couldn’t just fill your applications out similarly. After 60 days, the permit is considered proved if the government has not taken action on it. They need to act on it, not just let it sit on the counter and never give a response to the person asking to build something. There are a number of other items in there that would really restrict what the government can do when it comes to denying permits for accessory dwelling units.

If you look at older parts of San Diego County and the city as well as Los Angeles, you will see these everywhere and see where people have converted their garages and other parts of their homes. This is something Paul said they cannot deny is happening. What they want to do is bring it out of the shadows and have these things inspected and built correctly so they know they exist. They can then build them in the proper way. You cannot change the economic dynamics that cause people to say they want to bring their grandparents to their home or their kids into a place to live. They may need a little privacy or they simply cannot afford the home and need another renter.

Aaron asked if there is any limitation to them renting it out. He also asked about vacation rentals and if there is any stipulation to the things Paul is working on to limit what that would look like, whether it is a short-term or long-term rental or family. Paul said they are not seeking any of these limitations on an ADU. The theory is the case is they want more building and places where people can live. If this is something that can help alleviate the supply crunch, then this opens up a little bit of development opportunity. It is not something where you will double the amount of available homes since not everyone will do this. A lot of people do not want to, and some lots are just not built for it. You cannot overcome lot size or other parts of the law, and you have to adhere to some of the building codes.

Bruce and Paul next went on to talk about the PACE program. Bruce asked what it stands, for, which Paul said is Property Assess Clean Energy. It is a program for participating cities and allows homeowners to finance energy efficient improvements. This could include anything from solar panels and solar energy systems to insulation and dual pane windows. You can also water efficiency improvements such as drought tolerant landscaping. You do this with financing that has paid back your property tax bill. You take it alone, and you pay it back through your property taxes.

From a lender’s point of view if they have lent money on a first trust deed; if they are rehabbing the property and say they will use the PACE program for energy efficient improvements and not pay out of pocket, that bill could become senior to your loan if it is $30,000. Bruce asked if there has been any discussion about the concern of this. If the owner tries to resell it, Fannie Mae might look at it and see two loans on the property and not one. Bruce asked how Fannie Mae deals with this and whether they just say no to the loan. Paul said they deny it. There has been a lot of discussion about seniority due to the fact that this financing goes on the property tax bill and supersedes everything including that first mortgage. However, it is done after the fact.

If you actually look at the contracts that borrows sign with their lenders, the loan could be called to technical default. This is true with FHA mortgages and anything backed by Fannie Mae or Freddie Mac. It has not happened yet, and it probably would not happen. However, it is possible since you are not allowed to voluntarily place anything else ahead of your first mortgage. You have no control over the size and have no idea it has happened unless you are checking the property tax to see that it has increased. In no way, shape, or form are any of these PACE lender programs going back to the original noteholder, telling them what is about to happen, and telling them an estimated price range that could be between $15,000 and $65,000.

An exception to this is the commercial property. If you use PACE on a commercial property, the owner has to get permission from the lender to place the PACE assessment on it. Aaron wondered why this does not apply to residential, and Paul said it is simply because they would say no. This is when you start to get concerned about agendas since it does put somebody in good faith to put up money at risk that they did not know they were adopting. The other thing is there are a lot of rules now and nobody can be given a loan who is an owner-occupant since the rules are so restrictive. If somebody who is 80 years old comes in and wants to borrow money for a $400 grand house, Bruce would have to say no to this. However, they can borrow up to 80% of their house value on the PACE program.

Paul said they are limited to 15% of the current value of their property. They can take the accumulative loan to values if they have an existing mortgage on it and take that to 97 ½%. There are different rules for qualifying in that program than in any other loan program. The want of getting the green improvements is superior. Paul said they have made some significant reforms to PACE and feel by the end of this year IVAR may be in a position to no longer have opposition to the PACE program. Changes were made to everything but the lien superiority. The way they are trying to address this is it can be done through disclosure and a full understanding. If somebody borrows money through a PACE program and knows from day one they will have to pay it off when they sell their house; if there are no expectations set in any other direction, then it is manageable.

They also want to make sure there is more underwriting. Initially, there was no underwriting. Before, all they did was ask them if they owned a home, current on their payments, and paid their tax bill. Then all they had to do was sign and get a loan. From experience, Paul said you need to do a little bit more than that. The laws that are in effect right now this year and will be in force next year look at income, ability to repay, and whether they have the funds to afford the higher bill. There are a number of other items and incentives that, in the past, have provided contractors to build. These are also being done away with; so now it will be much more akin to a traditional lending program with the exception of the senior lien.

Aaron did not understand why they do not go into second place if they believe in it so much. It is a higher percentage rate than what the first is always going to offer typically. Paul said he could not fully explain the higher percentage rate other than that there are bond market dynamics that he does not understand. The fact that it is not in a senior position is essentially a bond market issue. If they did not do that, they would not have a program. The way it was initially done without underwriting would be an unsecured loan.

They ended by discussing what will be critical in this election year. People will make decisions based on all kinds of priorities. However, we really want people to take a look at how the elected officials are addressing housing. It is now a big enough topic in California that everybody is being asked to answer for that. There is nothing we can do today that will help to deal with the housing affordability problem in 2020 or 2021. However, we are talking about what housing market we are going to have in 2025, 2030, and 2040. This is what we can chip away at here. When people are looking at the answers that they are hearing from elected officials. They should look at what answers are being provided on housing questions, whether they sound realistic or make a difference and want to go further here.

Where the money comes from is everybody’s concern. Bruce asked if there is any budget crisis. You hear about cities having issues with retirement programs, and Bruce wondered if this is imminent for the Inland Empire. Paul said yes. By imminent, we mean within a five-year horizon. One example is Riverside County, whose budget is in very serious trouble at the moment, and it is growing year by year. Every year we do not address it means that the pain becomes worse. In his discussions with county leadership, they have been clear that in about 5-6 years they don’t have a way to fix the budget gap. There are no cuts that are possible to get there. At some point, we have to look at possible tax increases.

Lake Elsinore started something where every new development comes with a new taxing district. This is how they pay for the increased costs of firefighting and law enforcement. The communities are usually responsible for their own infrastructure, and that kind of concept is being discussed across the county, Inland Empire, and California. This will make homes even less affordable. Every home will have an additional $2,000 a year or $500 a year. Whatever that number might be is essentially there to cover the cost of government, which is to say the current taxing levels are not sufficient to fill those gaps. Either that, or the promises were too big in the first place. This is the biggest issue. People look at taxation and say they are being taxed too much, but they do not want to look at the front end where we are spending too much or not making the right decisions. If you are not dealing with the spending, you are not dealing with the taxing.

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