PACE Energy Efficiency Program Derailed

Property Assessed Clean Energy (PACE) programs face push back from Fannie Mae and Freddie Mac. PACE is a financing program through which local governments raise money for renewable energy retrofits by selling municipal bonds. Homeowners can then access this capital to help finance home energy improvements, such as solar panels for their roofs. The loan is paid back over the course of 15 to 20 years through a property tax assessment, which stays with the home in the event of a sale.

The problem, in the eyes of Fannie and Freddie, is that the loan is senior to the home mortgage. In a foreclosure process, the energy efficient loan is paid off before the mortgage lender gets their money back. The financing structure was implemented with other types of specialty property taxes in mind. Other property tax assessments for municipal improvements (i.e. sewers and sidewalks) are senior to home mortgages and have not raised red flags from mortgage lenders in the past. Additionally, the loan’s first lien status helps during the fundraising process when cities sell municipal bonds.

The Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, announced that it directed the mortgage lenders to allow current borrowers with existing energy efficient liens on their homes to participate without penalty. Additionally, the FHFA instructed Fannie and Freddie to consider avoiding the programs or tightening lending standards in areas where PACE programs move forward. Tightened standards could include approval from the lenders prior to borrowers implementing PACE financing or require homeowners to payoff the assessment in a sale or refinancing.

These tightened standards could seriously hinder PACE programs, which were intended to increase clean energy jobs and incentivize renewable energy adoption. Some municipalities have been holding back PACE applications because of the future uncertainty of the program. The municipalities are wary of putting the homeowner in a position that would violate their mortgage. The FHFA announcement was followed by letters from Reps. Henry Waxman  and Barney Frank stating that resolutions should be developed to continue the PACE programs without increasing the risk taxpayers or mortgage investors take on.