What Do We Do NOW?
September 02, 2010
A version of this article appears in the September/October 2010 issue of Home Energy Magazine.
Property Assessed Clean Energy (PACE) programs across the nation struck a bureaucratic brick wall this summer when the Federal Housing Finance Agency (FHFA) issued new guidelines for mortgage-lending practices in areas where PACE financing is available. Citing “significant safety and soundness concerns” arising from the fact that PACE liens typically take priority over mortgage debt in foreclosure proceedings, the FHFA directed Fannie Mae and Freddie Mac—the government-controlled entities that own or guarantee more than half of all home mortgages in the United States—to enact strict regulatory actions that have essentially made it impossible for homeowners to obtain mortgages on properties with PACE liens attached.
PACE lending, an innovative financial model rooted in traditional land-secured municipal finance, allows local governments to issue bonds to help property owners pay for energy improvements, with funds repaid via a special assessment on the owner’s property taxes. The concept has gained widespread acceptance over the past few years at all levels of government, with successful pilot programs launched in California, Colorado, New York, and other states. PACE has been authorized in 23 states and the District of Columbia, with nearly $1 billion in public and private investment, including $150 million in stimulus money allocated by the Obama administration to support the development of PACE financing programs.
The new mortgage guidelines specifically exempt property owners who obtained PACE loans prior to July 6, 2010, but the FHFA has effectively stopped all PACE lending programs in their tracks. Program managers, advocacy organizations, and state and local governments immediately began to call for judicial or legislative solutions that would allow PACE lending to resume, and at the time of this writing, federal lawsuits requesting a reversal of the ruling have been filed by the state of California and the town of Babylon, New York. Meanwhile strategic planning meetings have been organized by Congressman Steve Israel of New York to develop new legislation that would address the FHFA’s objections to PACE liens.
While the suspension of PACE lending represents a major setback to our national clean-energy policy goals, it is important to remember that PACE is not the only solution. Other viable financial models are available to pay for energy improvements, including:
Unsecured private-capital lending programs that allow contractors to provide direct financing to their customers. One example is the GeoSmart Loans from the Electric & Gas Industries Association. These loans are available for amounts up to $25,000 for efficiency retrofits and solar installations, with competitive interest rates, 24-hour approval, and direct deposit of funds. A second example is the Energy Finance Solutions by the Wisconsin Energy Conservation Corporation. Energy Finance Solutions allow contractors to provide financing options directly to homeowners for items including, but not limited to, furnaces, heat pumps, insulation, and appliances.
The Federal Housing Administration’s Energy-Efficient Mortgage program, which allows homeowners to finance energy improvements as part of home purchase or refinance. By working with commercial financial institutions to increase funding, and conducting consumer outreach through real estate professionals and mortgage brokers, this program could be expanded to reach many more American homeowners.
On Bill Financing (OBF) programs that allow homeowners to repay energy improvement loans via a surcharge on their monthly utility bills. This model is being implemented successfully by Clean Energy Works Portland, an Oregon-based collaboration involving local government agencies, three investor-owned utilities, a nonprofit community-development bank, and a nonprofit energy-management organization funded by utility ratepayer surcharges.
Utility Demand-Side Management (DSM) programs that leverage future savings in energy generation and distribution costs. The Austin Energy Residential Power Save program in Austin, Texas, for example, provides direct rebates and low-interest unsecured loans for whole-house energy retrofits to help the utility avoid having to invest in increased generation capacity.
Officials who now seek alternatives to sidelined PACE programs—or who must find ways to repurpose stimulus dollars that were originally earmarked for PACE financing—will find that infrastructure already exists to support these additional financing models, and that other programs around the country have demonstrated their potential for success. Until a solution to the PACE financing impasse is reached, we encourage policy makers, program managers, and home performance contractors to explore the alternatives and engage one another in the process.
Efficiency First board member Doug Donovan is a partner at Interplay Energy in Solano Beach, California. Jared Asch is the national director of Efficiency First, a nonprofit trade association for the Home Performance industry (www.efficiencyfirst.org).
For more information:
Energy program case studies and best-practices recommendations are available online from Efficiency First’s industry research arm, the Home Performance Resource Center (www.hprcenter.org). See “Best-Practice Business Models,” HE Sep/Oct, '10 p. 52.
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