For those loan officers who are advising alternative lenders or private lenders, HERO loans become particularly nasty. As we discussed last month, HERO stands for Home Energy Renovation Opportunity (HERO). It falls under the Property Assessed Clean Energy (PACE) program, which provides financing for energy-efficient, renewable-energy products to residential communities. As of this writing, 31 states have either adopted or are adopting PACE programs (including HERO 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 taxes. That means 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 acquire the properties in most scenarios) at risk.
As discussed last month, get the Preliminary Title Report (PTR) from title to see if a HERO loan exists on the property. If one does exist, keep reading.
The Alternative Non-Bank Lender’s Problem
Most HERO loans have the ability to subordinate if/when you…As argued last month, however, it is very difficult and the process alone is expensive and not guaranteed. However, even so, subordinations are limited to banks and credit unions – they will not subordinate to alternative non-bank lenders. Thus, this double standard will affect underwriting alternative lending loans.
Consumer Loan to Value Analysis
Alternative non-bank lenders will have to take into account the HERO taxes as part of their Consumer Loan to Value (CLTV) analysis. Due to HERO loans’ high interest rate, alternative non-bank lenders should consider creating an impound account to ensure these taxes are paid and lessen the lender’s risk on their file.
Non-Qualified Mortgage Loans
HERO loans become especially problematic in the non-Qualified Mortgage (QM) world. Even though non-QM loans can ignore Appendix Q, judges will likely look to it as a guideline. Hence, in determining whether a borrower has the ability to repay a loan, a lender should consider the HERO loans’ impact on the borrower’s debt-to-income (DTI) ratio.
An Easy Checklist
If you’re considering lending on a property that has a HERO loan, here is a good checklist for you to consider:
- HERO Loan Analysis
a. Loan Amount
b. Interest Rate
c. Property Tax Supplement - CLTV
a. What is the CLTV without regard to the HERO?
b. What is the CLTV with the HERO?
c. Within tolerance? - Ability to Repay (ATR)
a. Does the borrower have the ability to repay both the loan and the HERO taxes?
Be careful with HERO loans. They won’t subordinate and you could be holding the bag on an otherwise great underwritten property if a HERO loan exists. Do your homework and save yourself a fortune of headache and worry by considering the cost of the HERO loan in your underwriting.
