Earlier this year, the state of California announced a $10 million loan-loss reserve to solve the Federal Housing Finance Agency’s severe restrictions on using property-tax based financing for energy efficiency and renewable energy on residential property. It’s a great concept, but evidence from on of California’s best property assessed clean energy (PACE) programs suggests the reserve… Continue reading
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Does a Riverside County, CA, residential energy financing program put thousands of homeowners on a collision course with the Federal Housing Finance Agency (FHFA)? In a proposed rule-making, the FHFA has suggested that Property Assessed Clean Energy (PACE) policies represent a threat to the safety and soundness of mortgages held by government-backed Fannie Mae and Freddie… Continue reading
After effectively suspending residential PACE energy efficiency and renewable energy municipal financing programs in 2010 and then being taken to federal court and required to do a revised rule making, the Federal Housing Finance Agency (FHFA) released its revised ruling on PACE programs [pdf] today. Did they repent from their 2010 assertion that PACE presented… Continue reading
Property-assessed clean energy (PACE) financing launched three years ago with great promise. The premise was simple: pay for building energy efficiency and on-site renewable energy with long-term property tax assessments, aligning payback periods and financing terms. The residential program’s rapid expansion came to a screeching halt in mid-2010 when the Federal Housing Finance Agency told lenders that Fannie Mae and Freddie Mac would not buy mortgages with PACE assessments on them.
Commercial PACE was left alive, and programs for business and industry are finally getting scale.
In September, the Carbon War Room announced a business consortium would provide $650 million in financing for commercial energy efficiency and renewable energy improvements for two regions: Sacramento, CA, and Miami, FL. San Francisco announced a similar program in October, with $100 million in private funding. For comparison, the largest operational PACE program to date in Sonoma County, CA, has completed $50 million in retrofits.
An interesting difference in the new programs is that they inject private capital into PACE programs that were often envisioned as publicly financed (e.g. using municipal revenue bonds). It’s a welcome development, however, since public sector programs had grown slowly – if at all – since the FHFA decision to curtail residential financing.
The opportunity in commercial PACE alone is enormous. The Pacific Northwest National Laboratory estimates that building energy consumption could be cut by 15-20% in the United States with the right technologies and tools. Since buildings represent 40% of energy use, beefed up commercial PACE activity could be a big step in the right direction.
For more on the residential program and attempts to revive it, visit PACENOW.org.
A short slide deck providing a “101″ on Property Assessed Clean Energy (PACE) financing, a status update on the legal challenges, and some of the policy design issues we explored in our report on Municipal Financing Lessons Learned.
With a ruling that the Federal Housing Finance Agency (FHFA) must do a formal rulemaking on its 2010 decision to torpedo the innovative local finance tool for energy efficiency and clean energy retrofits, a federal judge gave Property Assessed Clean Energy (PACE) financing new life.
Earlier this year, it looked as if prospects were bleak for PACE in 2011, with some progress on Commercial PACE and a new director at advocacy organization PACENOW, but agonizingly slow steps on federal legislation and litigation.
Today’s ruling means FHFA has to start over, but it does not overturn the agency’s 2010 advisory against PACE, leaving the program in limbo until the formal rulemaking is complete. Here’s hoping PACE finally wins through, a great tool for saving energy and creating jobs at the local level.
February 9, 2011
Dear Members of Congress:
On behalf of the nation’s counties, cities and towns, we urge Congress to support legislation that clearly affirms the right of state and local governments to exercise liens or assess special taxes or other property obligations to protect and improve housing stock for the public good, including the installation of renewable energy and energy efficiency improvements, by directing federal regulators to enforce underwriting standards that are consistent with guidelines issued by the U.S. Department of Energy for Property Assessed Clean Energy (PACE).
As you know, the health and vitality of local economies are essential for reversing the national economic downturn. Despite sizable budget shortfalls, state and local governments, in partnership with the federal government, are working to maintain and improve efficiencies in federal programs that support the services that citizens expect governments to deliver. A further challenge, however, is that traditional mechanisms for local finance and revenue, such as sales and property taxes and bond financing, remain difficult to access. As a result, local governments are developing innovative financing programs, such as PACE, that will help neighborhoods realize community and economic development goals even in challenging fiscal periods.
PACE financing programs help property owners finance renewable energy and energy efficiency improvements – such as energy efficient boilers, upgraded insulation, new windows, and solar installations – to their homes and businesses. The PACE program removes many of the barriers of renewable energy and energy efficiency retrofits that otherwise exist for residential homeowners and businesses, particularly the high upfront cost of making such an investment and the long-term ability to reap the benefits of cost savings. Twenty four states plus the District of Columbia have already passed legislation enabling cities and counties to pursue PACE programs.
PACE is not a loan, but instead is built on traditional tax assessments, which local governments have managed for over 100 years. PACE was not designed to increase the risk of homeowners, business owners, lenders, or the financial system, and operates under stringent rules to ensure a net positive benefit to all parties. When fully implemented, PACE programs can achieve significant energy savings and provide positive benefits to the environment.
Unfortunately, rather than incent original solutions such as PACE, the Federal Housing Finance Agency’s (FHFA) determination that PACE energy retrofit lending programs present “significant safety and soundness concerns” effectively shuts the door on an important avenue for financing improvements that would deliver financial and environmental benefits long into the future. This determination is out of step with our nation’s economic recovery agenda and disregards the traditional authority of local governments to utilize the tax code in the best interest of its citizens.
In response to FHFA’s specific concern about the hypothetical risk to the secondary mortgage market involved with PACE homes, as local leaders responsible for investing hundreds of billions in public funds annually, we know well that risk is an inherent part of any investment. However, local governments constantly seek to minimize that risk; in our case, to the taxpayer. We believe that the standards and best practices called for in the Administration’s “Recovery Through Retrofit” report are sufficient to minimize any potential risk posed by the PACE program to both the public and private investments in a PACE home.
The PACE program is an achievement of the intergovernmental partnership to realize national policy goals, namely, reducing energy consumption, that will positively impact the fiscal conditions of every level of government. For these reasons, we encourage you to support legislation that will allow existing PACE programs to continue and encourage additional programs throughout the country. We look forward to working with you to ensure that local governments maintain the traditional authority to utilize the tax code for public benefit.
Late last year, the Federal Housing Administration announced a new PowerSaver loan program to provide financing for home energy efficiency improvements. The program comes on the heels of the downfall of residential Property Assessed Clean Energy (PACE) financing, which allowed homeowners to pay back energy efficiency improvements via long-term property tax payments, as well as to pass the payments on to the next homeowner. Can PowerSaver adequately replace PACE?
First, a bit of background on PowerSaver. The loan program is part of FHA’s Title I Property Improvement Program and the basic principle is that the FHA provides loan insurance for participating private lenders who loan to eligible homeowners. Federal insurance provides 90% coverage for the loan, with the lender only accountable for the remaining 10%, with limits on the portion of a lender’s portfolio in the Title I program. Participating homeowners pay a premium equal to 1% of the loan amount multiplied by the loan term. For example, a $10,000 loan financed over 15 years would have an annual premium of $1,500.
Loans are capped at $25,000 with 15 year terms for energy efficiency and 20 year terms for renewable energy investments. A list of eligible improvements can be found here. Borrower’s can only be owners of single-family, detached homes with a 660 credit score and a maximum 45% debt-to-income ratio. Loans under $7,500 can be unsecured, but larger loan amounts must be secured by the first mortgage.
The following table illustrates the major differences between PACE and PowerSaver:
|Backstop||Federal insurance||Local government|
|Credit score||> 660||n/a|
In most cases, the differences make the PowerSaver loan significantly less attractive than PACE financing. A PACE lien came before the mortgage, potentially allowing PACE programs to sell their obligations on the market and allowing local governments to obtain low interest rates. PACE liens did not require credit scores, allowing many Americans with damaged credit (but good property tax payment history) to make their home more energy efficiency and cost effective. Finally, the lien could be transferred between property owners, removing the discontinuity between the lifespan of effective energy efficiency improvements (15 years) and the average stay in one home (5 years).
Perhaps most powerfully, PACE allowed cities and counties to become a hub of energy planning for their communities, whereas PowerSaver simply backstops the private lending market.
FHA should be applauded for expanding the financing options available to homeowners for energy efficiency and renewable energy improvements, but their offering will not provide the same power as PACE.
Yesterday Michigan governor Jennifer Granholm signed the state’s Property Assessed Clean Energy (PACE) law, making Michigan the 24th state to enable cities and counties to provide financing for on-site renewable energy and energy efficiency improvements via the property tax system. But it’s unclear how many municipalities will move ahead given the roadblocks facing residential PACE… Continue reading