Although the Federal Housing Finance Agency (FHFA) has created strict requirements for residential property-assessed clean energy (PACE) programs, a few states and cities are continuing to develop programs and pass legislation.
PACE programs make it possible for homeowners to finance energy efficiency retrofits and pay for them gradually through property assessments.
To avoid putting homeowners at risk, some programs are attempting to work within the guidelines of the FHFA by making PACE liens lower-priority than mortgages, providing insurance for them, providing homeowners with disclaimers, and/or exploring other legal options.
These limitations don’t apply to commercial PACE programs, which are growing and thriving in many states.
A FHFA Statement Stalled the Growth of PACE Programs
In July 2010, the new residential PACE movement nearly stalled. The FHFA, newly created to protect the damaged housing market, issued a statement saying PACE financing would pose substantial risks to lenders and the loans “do not have the traditional community benefits associated with taxing initiatives.” The FHFA also expressed skepticism about the performance of the retrofits and the resulting energy savings. The agency advised Fannie Mae and Freddie Mac to avoid buying mortgages for properties with PACE assessments.
The FHFA has said that if communities go ahead with PACE programs that take precedence over mortgages and do not meet the FHFA criteria, it will direct Fannie Mae and Freddie Mac to tighten local loan-to-value ratios and make local income criteria stringent. Thus far, FHFA has not taken such measures with any communities.
“It took us by surprise,” said Cliff Staton, executive vice president of Renewable Funding, a company that provides financing and technology to advance clean energy. “We knew they had concerns about it, but there were many players in the administration who were actively supporting PACE - and trying to, in fact, spend hundreds of millions of dollars in DOE funding around the country.”
Lawsuits and Proposed Legislation Have Not Altered the Picture
A large network of concerned organizations has challenged the FHFA’s statement through both lawsuits and legislation. But the FHFA’s position remains unchanged.
“The timing of the rollout of PACE programs was difficult for FHFA and Fannie Mae and Freddie Mac,” Staton said. “They were suffering the worst of the housing meltdown. From their standpoint, I could see how it might seem like a potential problem.”
“The FHFA was created by Congress in response to the market meltdown,” said David Gabrielson, executive director of the advocacy organization PACENow.
Staton said the legislative challenge to the FHFA’s position came from a congressional bill that was introduced by Rep. Mike Thompson, D-Calif., in 2010. Despite widespread bipartisan support, the bill became mired in gridlock and did not pass.
“We got over 50 co-sponsors for that bill in the House ranging the political spectrum from very liberal to very conservative,” Staton said. The supporters included hundreds of organizations from Fortune 500 companies to environmental organizations and chambers of commerce.
The broad bipartisan appeal of PACE programs is due to their job creation potential, minimal cost to governments, and reduction of greenhouse gas emissions, Staton said. Local government rights are also an important issue. He said conservatives thought the FHFA, as a federal organization, should not dictate to states and localities that they should steer clear of creating PACE programs.
A few lawsuits were filed in response to the FHFA statement, but all of them have now run out of steam without successfully pressuring the FHFA to change its position. The first two lawsuits, from communities in New York and Florida, were dismissed. Another lawsuit in California made progress until the U.S. Court of Appeals for the 9th Circuit stated the FHFA was acting as a conservator of the public good and could not be pressured legally into changing its opinion.
Residential PACE Programs Are Moving Forward
Many states and municipalities have legislation that enables residential PACE. Some even have residential PACE programs. These programs are continuing to advance and find innovative ways to address the stringent requirements of the FHFA.
According to Gabrielson, state and local governments have taken a number of different approaches to residential PACE as a result of the FHFA’s positions. There are several approaches municipal and county programs can take if they want to pursue residential PACE.
Some have chosen to make PACE a junior lien with lower priority than mortgage payments. Staton said four states have taken this approach - Vermont, Oklahoma, Maine and Rhode Island. However, this approach is less attractive to investors than senior-lien PACE is, Staton said.
Gabrielson said Vermont Energy Investment Corporation has taken this approach to attract investors to its subordinate lien program and has used funds from the Regional Greenhouse Gas Initiative to insure PACE loans. The organization also collects an insurance premium from each participating homeowner.
Some municipal and county programs keep PACE as a senior lien, providing disclaimers for homeowners enrolling in the programs. Western Riverside Council of Governments has taken this approach in California with the HERO Program. According to Staton, homeowners have been responsive to the program.
Laura Franke, a senior managing consultant at Public Financial Management, a government and nonprofit financial advisory firm, said the HERO program’s developers have met with the FHFA’s general counsel. The program addressed the FHFA’s requirements by giving homeowners two cautionary messages. The first message tells homeowners they should review their mortgages for any provisions that may be triggered by the assessment. The second message says they may have to pay off their assessments when they sell or refinance their homes.
HERO Programs are expanding their reach throughout California. Franke said 31 cities in five counties have passed resolutions authorizing participation in a statewide program. She also said another HERO Program is being launched in San Bernardino County. This program will include 23 cities.
Existing PACE Programs Are Performing Well
The FHFA’s concerns about risk have not been borne out by existing PACE programs thus far. Gabrielson co-signed a lengthy statement addressed to the FHFA that cited the successes of residential PACE to date.
The statement provides evidence that PACE retrofits increase the value of homes. It also says PACE does not affect the decisions of home appraisers. Some evidence shows PACE retrofits may reduce the risk of defaults on mortgages by making energy more affordable.
"They think homeowners might go into default," Staton said. "That’s not been happening. People are not going into default." Gabrielson said research from California shows that in three PACE programs with a total of around 3,000 homes, the default rate for mortgages has been less than one percent.
"Energy-efficient homes sell for a premium," Gabrielson said.
The statement came from over 29 organizations ranging from the American Council for an Energy-Efficient Economy to the Vote Solar Initiative. According to the statement, over 3,000 comment letters were submitted to the FHFA in support of residential PACE programs.
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