Imagine a government program that improves home values, reduces home ownership costs, saves energy, creates jobs, increases tax revenues without increasing taxes, requires no government subsidies, and leverages private capital for social good.
No need to imagine, that’s the Property Assessed Clean Energy (PACE) program, which is now authorized by 28 states and the District of Columbia as of August 2012. PACE removes two barriers to improving energy efficiency and installing renewable energy systems in homes—high upfront costs and the fear of recovering those costs before the property’s sale. Implementation of PACE for residential properties ground to a halt when the federal government, which owns most home mortgages in the country, objected to a PACE lien being in first position for payment in the case of mortgage default.
Here’s how PACE works: A state or local government establishes, in statute or other policy, that the public purpose of a PACE program (clean and renewable energy, jobs, better air quality, etc.) is valid. Then a real-property secured-benefit district is formed (if it’s not an entire municipality already). District property owners may participate or not; those who do not participate won’t see their taxes or assessment change as a result.
To participate, an energy audit is usually required to determine the cost-effective measures to be performed by a qualified contractor. Financing is provided by the special district, typically by selling bonds that are secured solely by the payments received from participating property owners. General taxpayers are not on the hook in any way. Property owners who benefit pay off the costs for up to 20 years as part of their regular tax bills. Typically, PACE financing won’t exceed 10% of the property’s value; only properties with positive equity are eligible, and the program is available only to property owners who have a good tax payment record. There also must be no involuntary liens (PACE is a voluntary lien) on the property.
Because the ongoing cash savings to property owners exceed the added PACE assessment on the property, repayment is easy. The obligation transfers to the new owner if the property is sold. If the property goes into default, the bondholders are protected, since the government assessment of “taxes” is not a loan—it is first in line for repayment when the property is sold.
In 2008, PACE began as pilot programs in California, and was replicated in 23 states in just two years. Then, just as implementation was beginning, the residential programs came to a screeching halt in the spring of 2010 when the Federal Housing Finance Agency (FHFA) and the Office of the Comptroller of the Currency (OCC) said that PACE “presents significant safety and soundness concerns to the housing finance industry.” As the housing finance industry was already significantly unsafe and unsound due to lenders making loans on homes with highly inflated values, the two federal agencies were concerned about making things worse. The FHFA regulates Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), which hold $5 trillion in mortgages. Fannie and Freddie are “government-sponsored enterprises,” Congressionally chartered corporations that the government bails out when they get into financial straits. Fannie and Freddie defaulted in 2008, so the FHFA now also serves as their conservator, as well as regulator.
“Typically, the tax liens created by assessments are senior to other obligations, like mortgages, and must be paid first in the event of foreclosure,” notes the Lawrence Berkeley National Laboratory in the “Clean Energy Financing Policy” 2010 brief. “Fannie Mae, Freddie Mac, the FHFA and other financial regulators reasoned that PACE assessments were, in effect, loans—not assessments—and as such violated standard mortgage provisions requiring priority over any other loan.”