More like VILLAIN loans. Here’s What You Need To Watch Out For-They Will Either Delay Your Deal, Kill Your Deal, or Worse…
Everyone loves the hero, right? I imagine a knight in shining armor riding into the fray rescuing the damsel in distress. Don’t you? When I first heard about HERO loans, I associated my vision of a hero with HERO – as I’m sure they wanted me to. But they are far from HERO loans – they are more like VILLIAN loans – dark, shady characters waiting to steal from your pockets, blow up your loan, or even worse, make you lose thousands of dollars.
We will discuss HERO/PACE loans in detail, what makes them constitutional, how they are arranged, what your risks might be, and what is actually going on out there. In Part 2 of this article, we’ll show a real-life HERO loan and scenario and what you might want to do to protect yourself and/or your borrowers from these villains.
What is a HERO loan?
HERO stands for Home Energy Renovation Opportunity (HERO). It falls under the Property Assesed Clean Energy Program (PACE) program which provides financing for energy-efficient, renewable energy products to communities in general. As of this writing 31 states have either adopted or are adopting PACE programs (including HERO loans). See chart below for which states.
Does The Hero Save The Girl? It does if the Girl is the investor in the loans!
In most states, HERO loans are issued by state bond laws. What does that mean? In short and simplified terms, it means these loans have the same priority as property tax-es. That means that they are superior to the liens issued by mortgage lenders. Thus, failure to pay these liens puts all liens junior to them (the very financing used to ac- quire the properties in most scenarios) at risk.
THE GSEs Slay the HERO
In its Selling Guide issued July 25, 2017, Fannie Mae states that it will not purchase any PACE loan that does not subordinate to its loan. Freddie Mac says the same thing. Since all loans are basically pre-sold to Fannie Mae prior to bank funding, this effectively slams the door on traditional financing for HERO loans without such sub-ordination. FHA refuses to finance as well without subordination.
…but HERO will subordinate upon an application!
Yes, there are provisions and ability for HERO loans to be subordinated and thus allow a GSE lien to be in place. However, as recently as last year there were issues with Fannie Mae and Freddie Mac accepting HERO’s subordination language.
Regardless, there is a definite chill on the sales process of a home. Agents can expect a longer DOM for a house due to the HERO loan. Further, because GSEs do not al- low HEROs as part of Assessments, they must be included in the CLTV of the property.
So What’s Next?
Where can a buyer turn? Where can a borrower turn? Possibly to alternative non-bank lenders or private money lenders. However, for a LO who wants to close a loan, this effectively becomes a headache and a potential non-starter for them. Best case scenario there are more hoops to jump through for the borrower to close their loan.
What Can a LO Do To Protect Themselves and Their Borrowers?
1. Get the PSA / Loan Application and See If a HERO is Disclosed. Seems obvious. Review the purchase agreement or loan application and see if a HERO was disclosed in the agreement. If it wasn’t, then you still need to check one more place, but at least you have an indication that one may not be on there.
2. Review the Preliminary Title Report (PTR) and See if It is Under Additional Taxes.
Get a PTR as soon as possible and review it. Under the Tax Exceptions portion of the PTR a HERO loan would be listed. In California, for instance, the title of the HERO loan typically is “Notice of Assessment and Payment of Contractual Assessment Required.” It may be titled something else and will typically be right before, at, or right after the special assessments disclosure in the PTR. If it is there, then you know you have a HERO you need to lay!
My Borrower has a HERO Loan– Now What?
See if you can get the HERO loan subordinated. As of the writing of this article, HERO will only subordinate to new financing if (1) a bank or credit union requires it, (2) a $350 subordination fee is paid, and (3) it is an arms-length transaction. Also run the subordination by the GSE who will purchase the loan from your bank – make sure they accept the purchase, otherwise the deal is dead in the water.
Conclusion
HERO loans in the residential sector are dangerous instruments with little oversight by the lending authority and given super-priority status. This is a recipe for disaster. Be careful when dealing with a property with a HERO loan. If you can push the deal through, make sure you get the subordination lined up FIRST, otherwise, you’re going to do a lot of work for no reason.
This is the first part of a three-part series. Part Two will focus on Alternative Lenders and HERO loans and Part Three will focus on Real Life Stories of Dealing with HERO loans. Have one? Email me at anthony@geracilawfirm.com and I may include you in Part Three.
