PACE programs get their final blow?
PACE assessment programs may have received their death blow this week in the form of a letter (pdf) from Federal Housing Finance Administration (FHFA) Acting Director Edward DeMarco. In short, the letter sent to members of Congress working to save the finance mechanism says that the PACE program structure presents too much of a risk and cannot be fixed. FHFA, which oversees Fannie Mae and Freddie Mac, will not allow the two companies to purchase loans that include PACE liens on them.
PACE assessments allow homeowners to make energy efficiency improvements without large upfront costs and with low interest rates because the loans are paid back via property tax bills. The design of the program means that the loan payments stay with the property, meaning those who are getting the benefit of lower energy bills pay for the cost of the upgrades. FHFA in May said this structure poses risks to investors because the assessments are senior to mortgages. In other words, in the event of default, they are paid before the mortgage.
When news first broke of this apparent disconnect in the Obama Administration (his Department of Energy pledged $150 million toward PACE programs), supporters of the financing model immediately took to trying to refute FHFA's position. Property tax assessments are, "a municipal finance tool that has been in use for over 100 years," according to Cliff Stanton, vice president of marketing for Renewable Funding, which administers San Francisco's Pace program, GreenFinance SF. "It allows local govs to make improvements to provide for the public good and lets homeowners pay for these improvements on their property taxes. [FHFA] has never raised an issue about these districts."
Even then, however, FHFA wasn't buying it. "Most taxes don't benefit the homeowner but rather benefit the community," a representative of the administration told me in May. He also expressed concerns about "a lack of underwriting standards" that could lead to a lot of bad loans being made, and a lack of national energy improvement standards that could mean homeowners won't see an increase in efficiency equal to the cost of the loan.
Now, FHFA's interest in saving the program seems to be dead:
No satisfactory conclusion has been reached to address problems associated with liens created after a mortgage is in place, thereby transferring credit risk to banks, secondary market parties and investors in mortgage-backed securities. Further, consumer protections and appropriate underwriting standards need to be uniform and mandatory to protect homeowners. Discussions have failed to produce concepts that would mitigate the threat to FHFA-regulated institutions or to broader financial markets.
FHFA, therefore, has determined that its guidance to its regulated entities must remain in place.
There are other program designs that could yield affordable energy efficiency upgrades such as on-bill financing and group purchasing programs (which is most often used for new solar purchases), but none of those has proven yet to be as popular as PACE, a program that was just three years old, and already spreading like wildfire across the nation.