Posted on January 5, 2012 in Energy and Environment
Property Assessment Clean Energy (PACE) programs have attracted a lot of attention in the last three or four years. The obvious advantages of PACE programs are that they are voluntary (all eight SLC states that have authorized PACE programs that allow local counties and/or municipalities to make the decision to participate) and they address the largest barrier to energy efficiency improvements: large upfront costs. The following SLC states that have passed PACE legislation (click on the hyperlink for bill text):
In all of these states, local governments are the ones who determine funding sources; establish interest rates and terms of loan; authorize participation of private lenders; determine the method for collecting loan repayment (e.g., water/sewer bills, real property tax assessments); etc.
Nevertheless, many states have not seen municipalities take up such programs. This most likely is attributable to the Federal Housing and Finance Administration, the agency that regulates mortgage finance giants Fannie May and Freddie Mac, issuing a letter in July 2010 that said they would not purchase loans subject to PACE liens (ostensibly, their concern was that if a property goes into foreclosure, PACE liens must be satisfied before the mortgage lender gets any money). This move eliminated, or at least potentially restricted, one of the most appealing aspects of the PACE program: its ability to make energy efficient improvements today and pay the costs over time, or pass costs off to future purchasers. I.e., since banks typically want to sell to Freddie or Fanny, whenever homeowners want to refinance, the PACE liens would have to be paid in full; therefore, banks aren't lending. Hypothetically, the same holds true for homeowners participating in the PACE program who want to sell to a buyer using financing. The PACE loan must be taken care of first.
One option is to make PACE programs available to commercial/industrial properties, not homeowners, and only those current on their taxes, mortgage, and that are proposing projects that cost no more than a certain percentage of the state equalized value of the property, before improvements. Ann Arbor (possibly the only municipality in Michigan who has gone forward with a PACE program) has done this. They limit the project to $350,000 and 20 percent of the property value. The owner also must be able to pay back the loan in 10 years. Some states, like Oklahoma (SB102, see above), have passed similar PACE "fixes," which establish that loans under these programs will be junior to any mortgage or lien attached to the property prior to issuance of PACE loan.
It's also worth noting that there is legislation in Congress (HR2599) that would prevent Fannie and Freddie, and other federal residential and commercial mortgage lending regulators, from adopting policies that contravene established state and local property assessed clean energy laws.