Changes in the tax law could reduce demand for the controversial Property Assessed Clean Energy Loans, according to a new ratings agency report.
As a result of the Tax Cuts and Jobs Act, the mortgage interest deduction has been reduced on PACE loans. In addition, deductions for state and local taxes have been cut.
Investors of mortgage-backed securities are being advised that
the changes may potentially result in faster prepayments, especially for higher FICO borrowers who can afford to pay off the lien, and lower origination volumes.
Providing the commentary was Morningstar Credit Ratings
in the report Residential PACE May Become Less Attractive in the Wake of Tax Reform.
The report highlighted how interest deducted on mortgage debt is now limited to $750,000 in debt, down from $1.0 million. With the bulk of PACE loans made on high-priced California properties, most of deductible debt is the first mortgage — lessening the benefit from PACE loans.
At the same time, deductions for SALT are being limited to $10,000.
The reduced mortgage interest and SALT deductions
combined with the increase in the threshold for standard deductions make it less attractive to itemize.
As a result, any tax benefits derived from PACE loans are muted.
“While it is too early to tell exactly how the new tax laws will affect borrower behavior, Morningstar believes the changes may cause some borrowers to reconsider their PACE funding options, potentially motivating faster prepayments, especially among higher FICO borrowers,” the report stated. “In addition, origination could dip a bit as PACE loans become less beneficial from a tax perspective.”
