Keeping PACE

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Beyond leasing, another program that’s helped property owners fund energy-saving improvements is the Property Assessed Clean Energy (PACE) program. This financing method gives homeowners the option to pay off the costs through surcharges on their property taxes, which are assessed over the course of up to 20 years and stay with the home even if it is sold. 

As part of the American Recovery and Reinvestment Act of 2009, the PACE program is backed by more than $150 million in federal stimulus funds and overseen by the U.S. Department of Energy—though individual programs are administered by local jurisdictions.

The Structure of PACE

PACE programs have long-enough payback periods to keep the utility savings greater than the monthly payback amounts—but short enough so that the project will continue to produce savings after it is paid off.

While interest rates on PACE assessments are equal or higher than those on home equity loans, PACE requirements tend to be more lenient. Banks might require a homeowner to have at least 20% equity in the property, whereas equity requirements for PACE assessments tend to be lower—in some cases, homeowners may only need to match the loan amount dollar-for-dollar in equity—so $5,000 in equity for a $5,000 assessment. 

Halting the PACE

Over the past two years, 27 states and the District of Columbia have passed laws allowing their local governments to administer PACE programs. Yet virtually all programs came to a halt last year when Fannie Mae and Freddie Mac discredited the PACE program in letters sent to lender groups around the country. 

The government-chartered mortgage giants, which are involved in underwriting 90% of all mortgages in the country, warned that PACE assessments were violations of mortgage terms and could be grounds for foreclosure. Mortgage regulators at the Federal Housing Finance Agency (FHFA) followed up with a statement that directed Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to reduce and restrict underwriting of mortgages with PACE assessments.

As a result, some lenders now require homeowners to pay off any new or existing PACE assessments prior to refinancing or selling their homes—instead of allowing them to transfer ownership, similar to other property assessments. 

Without transferability, PACE has lost much of its value as a market driver, according to Jason Coughlin, a solar-market analyst with the National Renewable Energy Laboratory in Golden, Colorado.

“A stumbling block [for solar adoption] has been that most people move on average every five to seven years and haven’t wanted, or rather couldn’t justify, the up-front costs when they knew they would move before realizing the payback,” Coughlin says. “The appeal of PACE programs was that homeowners only pay for the project while they’re in the home. When the house is sold, the next buyer picks up both the benefits and the costs associated with it. Under the current guidelines imposed by the FHFA, that is no longer the case.” 

The FHFA’s declaration put PACE programs, both existing and planned, on hold and prompted several entities—including the state of California, Sonoma and Placer counties, the city of Palm Desert, and the Sierra Club—to file lawsuits against the FHFA. 

In August, U.S. District Judge Claudia Wilken of the Northern District of California found that the FHFA had ignored its formal rule-making procedures when it issued the letters. As a result of the California ruling, the FHFA now will have to hold a public notice and comment period, and address any comments by either modifying the PACE ruling or justifying its unwillingness to do so. 

The California judgment comes after rulings by two judges in New York favored the FHFA, dismissing similar challenges filed by the Town of Babylon on Long Island and the Natural Resources Defense Council. Both groups are appealing those rulings. Another lawsuit filed by Leon County in Florida is currently moving through the state’s federal court. 

Taking Action

In response, Congress has introduced the PACE Protection Act. If passed, this act would force the FHFA to rescind its warning and prohibit lenders from discriminating against homeowners and communities participating in PACE programs. 

The legislation addresses the concerns of the FHFA by calling for more stringent underwriting criteria, consumer protections, and measures to reduce the risk and financial exposure to mortgage holders. It also clearly defines PACE as an assessment, not as a loan—a key point to the FHFA’s position on senior lien status. Key provisions would standardize equity requirements, asking homeowners to hold at least 15% equity in their properties, and limit the size of projects to 10% of a home’s value. 

Whether the new terms will satisfy the Federal Housing Finance Agency remains to be seen. The bill is under House committee review and expected to be introduced in the Senate in the coming months. 

Senior Status

In most jurisdictions, PACE assessments, like other property taxes, are secured by a lien on the property that ranks senior to the first mortgage. If a property owner fails to pay property taxes, the county can foreclose on the property to collect delinquent taxes. In most cases, however, the delinquency is paid off prior to foreclosure.

The majority of state legislatures gave PACE liens senior status in their respective authorizing bills, since most local governments cannot secure funding at competitive rates without it, says Amanda Vanega, a policy analyst at the North Carolina Solar Center. 

“Senior lien status is a strong guarantee, the strongest, that the money would be paid back in the event of a default,” Vanega says. “Banks see the PACE program where the PACE lien has senior lien status as low risk and provide local governments funding at a relatively good rate, and then the local government can, in turn, offer decent terms to participating property owners.” 

Federal housing officials maintain that the property liens and tax assessments used by PACE programs put lenders at risk in the event of a mortgage default. “The FHFA acts as if the PACE program is reinventing the wheel, but a senior special tax or assessment lien is an exceptionally common practice in the United States,” says Adam Browning, executive director of the VoteSolar Initiative, a San Francisco-based advocacy group. 

The country has more than 37,000 special assessment or special tax districts, which have been used to finance projects including street paving, parks, open space, water and sewer systems, street lighting, and seismic strengthening. 

The FHFA’s concerns that PACE financing creates additional risk for mortgage holders and homeowners are “completely unsubstantiated,” says Gina Lehl, a manager with the Sonoma County’s Energy Independence program, which is among the few PACE programs still active in the country. 

“The default rate is very low, miniscule. The people that participate in these programs tend to be more financially savvy and more conscientious,” says Lehl, who won a grant to create a manual for other California jurisdictions to use in replicating the program. 

The program’s data bears this out: PACE properties have mortgage default rates that are 30 times lower than average. According to David Gabrielson, executive director of the advocacy group PACENow, a survey of program administrators found that there are only two known defaults of the nearly 2,500 existing PACE liens. 

While the fight to restore PACE programs continues, the question remains whether the demand for PACE still exists. “If reinstated on a national scale, PACE programs must now compete with solar leasing options that were not available a year or so ago,” Coughlin says. “The PACE window may have closed. Only time will tell.” 

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