Since their inception in 2008 in California, Property Assessed Clean Energy (PACE) loans have provided homeowners and businesses with the upfront financing necessary to implement energy efficiency retrofits as well as the installation of solar arrays. These loans are funded by municipal bonds at low interest rates and, in general, have a payback term of 20 years. Another benefit for borrowers is that they are only required to make payments on the loan annually through an increase in their property tax. In theory, the borrowers should gain more in combined energy savings throughout the year than they must pay out at the end of the year. As such, the idea quickly caught on with states across the country including Maryland, North Carolina, Ohio, and Virginia, all of which created their own PACE programs.
However, on July 6th, the Federal Housing Finance Agency (FHFA) stated that these loans “present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities and are not essential for successful programs to spur energy conservation.”i The FHFA have taken this position because PACE loans are senior liens on a borrowers’ property, which means they take precedence over other mortgages. The FHFA oversees Freddie Mac and Fannie Mae and the organization believes this senior lien presents a risk to their mortgage portfolio. Currently, all PACE programs have been put on hold until further notice.
The FHFA needs to understand that PACE is a key component to the successful implementation of a sophisticated domestic energy policy. Many stakeholders have voiced their concern are trying to reverse or sidestep the FHFA’s resistance to the program. The State of California has filed a lawsuit against the FHFA, while numerous senators have introduced legislation that could potentially save PACE funding. Hopefully, they will prevail, since the program is a great way to create growth in the renewable energy sector and does not burden the borrower with high interest rates like many other lending opportunities. The most promising option appears to be a compromise in which the FHFA allows for a “pilot project” of between 10,000 – 300,000 homes to test out their concern over the perceived risk of this financing option.ii If approved, the success of this test cycle could lead to an increase in funding for solar energy systems.
i Werthan, Jeffrey. “Federal Housing Finance Agency Warns About PACE Loans; Warning Communicated by FDIC,” Corporate Financial Weekly Digest < http://www.corporatefinancialweeklydigest.com/2010/07/articles/banking/federal-housing-finance-agency-warns-about-pace-loans-warning-communicated-by-fdic/>
ii Hiskes, Jonathan. “Fate of PACE clean-energy programs about to become clearer.” < http://www.grist.org/article/2010-07-20-fate-of-pace-clean-energy-programs-about-to-become-clearer/>