PACE (Property Assessed Clean Energy) is an acronym for a set of programs designed to allow homeowners to finance renewable energy systems in their homes.
It is conceptually quite simple: Instead of a homeowner having to borrow $20,000 for a solar energy system (or come up with it out-of-pocket), and then get partial rebates or tax credits, the city, county or state where the owner lives would front the money (using funds typically raised from bonds). The homeowner would pay back the money so lent over a period of years through an additional property tax assessment, so much per year. If the property is sold, the tax assessment remains -- the debt is transferred to the new owner.
Since many homeowners don't have access to enough capital to undertake significant energy-savings projects (or even if they do are unwilling to use it for projects that only end up saving money over a period of 10 or 20 years), this would seem like the perfect plan. Extremely low risk to the lender (since the payments are linked to the property and paid through the existing property tax mechanism -- and we all know that only two things are certain in life). Very little hassle for the owner (once you've been approved and the system installed, just pay your taxes as usual). And the world gets a little more breathing room.
What's the catch (there's always a catch)?
Well, believe or not, until about a month ago, there was no catch. PACE programs had been breeding like rabbits across the country since the idea was first developed in Berkeley, CA, a few years ago, and have already spread to 22 states in one form or another.
Then all hell broke loose. the Federal Housing Finance Agency (FHFA), the US Treasury, Fannie Mae and Freddy Mac (the government-owned corporations that guarantee a very large number of the housing loans made in this country), all suddenly realized that PACE was potentially puking on their profits.
How so? Well, the additional tax burden generated by a PACE loan is actually a lien against the property the loan is made against. And that lien, because of the way the program is set up, has priority over any mortgage obligation. So if the owner stops paying his taxes and his mortgage and the house has to be foreclosed on, the funds obtained from foreclosure and resale will be used to pay off the energy lien, along with the property taxes owed, BEFORE being applied to the mortgage balance. If a property is 'under water', meaning that its resale value is less than the mortgage due, this could be a hit on whomever owns the mortgage.
Let's try a (simplified) example. An owner stops paying his taxes and mortgage, and finally the bank decides to foreclose. The house is foreclosed on and the bank resells it.
Mortgage balance: | $250,000 |
Resale: | $200,000 |
Unpaid Taxes: | $5000 |
The first rule of life is you have to pay the tax man, so of the $200,000 the bank gets, $5000 goes to the government, and the bank gets $195,000, losing $55,000 on the whole transaction.
But what if their is an energy lien as well on which the owner has also stopped paying (since he hasn't paid his taxes, he hasn't paid on the energy lien either, since they are billed together)?
Mortgage balance: | $250,000 |
Resale: | $200,000 |
Unpaid Taxes: | $5000 |
Unpaid Amount on Energy Lien: | $1000 |
If the energy lien is next in line after what's due for taxes, then $5000 goes to the government (again), $1000 goes to pay the balance on the energy lien, and the bank ends up with $194,000, losing an extra $1000 on the deal.
If the mortgage took precedence over the energy lien, then $5000 goes to the government for taxes, $195,000 goes to the bank, and whomever is holding the energy lien (probably a local or state government) is out of luck.
Since existing PACE loans on a property were likely taken out long after the mortgage on the property has been issued, the mortgage underwriter had no way of factoring in this extra risk. And future mortgages are similarly vulnerable, since no one can reasonable predict whether a homeowner is going to apply for and get a PACE loan in the future.
And the result?
The FHFA's announcement, coupled with an earlier letter of concern about PACE from mortgage giants Fannie Mae and Freddie Mac, point to at least a freeze in the use of PACE programs and potentially their ultimate demise. The FHFA and Treasury Department have both instructed banks to place additional restrictions on home loans to borrowers in jurisdictions that have PACE programs, among other directives...
"Before this latest FHFA action, PACE was poised to weatherize millions of homes and place tens of millions of solar panels on residences across the nation. Thousands of non-exportable jobs in the crucial residential construction industry have been jeopardized."
Congress has taken notice. According to the San Francisco Chronicle, Representative Doris Matsui of California has sent a letter to President Obama, signed by 60 other representatives, urging the President to take action to prevent mortgage lending agencies from derailing the program. And Matsui's letter
"followed the introduction of legislation by Rep. Mike Thompson, D- St. Helena, demanding that the federal agency comply with the PACE plans."
Also,
"a blizzard of statements have been issued... Senators Boxer, Schumer and House Speaker Pelosi ... and others have sent such missives."
But
"The agency ((the FHFA)) has remained quiet and defiant. In response to California's lawsuit, it issued a one-paragraph statement saying that it would "defend vigorously its actions that aim to protect taxpayers, lenders, Fannie Mae and Freddie Mac."
So it seems that for anything effective to be done, Congress needs to act (did I just hear you laughing hysterically in the background just now; I thought so). Congress will have to specifically instruct Fannie, Freddie and other government agencies to permit PACE liens to be drawn up on properties with existing mortgages, without costly and burdensome restrictions, or else the whole program may be doomed:
The uncertainty about the future of PACE has placed in doubt hundreds of millions of dollars in federal stimulus money and may negate years of planning by state and local agencies... The DoE must commit stimulus funds by Sept. 30, which must then be directed by the California Energy Commission by October 21st... If the funds are not set aside by the deadlines, they may be lost.
Let's face it. This is basically ridiculous. There is no point allocating federal funds for home energy projects if the Federal government then turns around and blocks the loans necessary to make (most of) those projects a reality. The left half of the government's brain can't or won't control what the right half is doing, or if it can, at the moment it doesn't care to.
The President and the Congress need to sit down and solve this once and for all (in any sensible world, this would take a couple of days; in the real world, with the usual Republican and ConservaDem maneuvering and objections, it could take literally forever).
This is probably a case where calling your Senator or Congressperson, even if they are a Republican might do a lot of good. Yes, some Republicans might object, but at least it is not obvious how their ideology would favor killing these programs. Perhaps they will see this as chance to both rail against and do something about Stupid Big Government Bureaucracy. So much the better if so.
Your representative probably isn't receiving tons of calls on this topic, it's not exactly on the front page every day. So your call might actually have a significant effect.
The program has the potential to quickly and efficiently transform the home energy market to favor conservation and renewable energy, stimulate demand and provide jobs. It's a win-win. All somebody has to do is lead.