California County's PACE Program Could Get Feisty with Feds

John Farrell
November 27, 2012 | 7 Comments

Does a Riverside County, CA, residential energy financing program put thousands of homeowners on a collision course with the Federal Housing Finance Agency (FHFA)?

In a proposed rule-making, the FHFA has suggested that Property Assessed Clean Energy (PACE) policies represent a threat to the safety and soundness of mortgages held by government-backed Fannie Mae and Freddie Mac. PACE is a unique financing strategy that allows homes and businesses to invest in significant energy efficiency and renewable energy upgrades and pay them back through a property tax assessment (for an explanation of PACE, see this PACE 101 slideshow). The fight with FHFA stems from these assessments being “first liens,” e.g. in the event of bankruptcy, they are paid back before the mortgage holder (FHFA’s Fannie or Freddie).

The FHFA’s initial ruling in 2010 brought most residential PACE programs to a screeching halt, because residential participants would be threatened with having to pay their entire mortgage – in full – at any time. Residential PACE programs in Boulder, CO, and Sonoma County, CA, and elsewhere were suspended after the FHFA ruling.

But Riverside County launched its Home Energy Renovation Opportunity (HERO) Financing Program in late 2011, almost a year after FHFA had thrown down the gauntlet. Since then, over 2,000 homeowners have signed up (acknowledging the FHFA threat in writing) and proceeded with tens of millions in home renovations improving efficiency, generating local energy, and creating jobs. These participants have already met thresholds for positive equity in their home, and been current on the mortgage and property tax payments.

By keeping the program alive and using strong guidelines for participating homeowners, Riverside County puts a serious question to Fannie and Freddie: are they willing to default or accelerate mortgages on thousands of homes, all with mortgage holders who are customers in good standing?

Lead image: Warning sign via Shutterstock

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7 Comments

Douglas Jones
November 29, 2012

Good thoughts. Bottom line under PACE the homeowner pays a loan for solar and energy improvements instead of an electric bill. Homeowners utilities are not deductible. So deductible interest is a plus at beginning of the Contract. Cost to the mortgage company are not much different paying for PACE or paying a utility bill on a vacant house. My understanding is surplus electric generated if the house were vacant would be paid to the mortgage company. Only problem is money spent on energy improvements (which are the easiest and cheapest to complete) and the solar component both need to be amortized by the dollar amount of the reduction on the electric bill. If that happens or are the parameters of the program why would the investors that buy the mortgages care?

V. Bruce Stenswick
November 29, 2012

So what is the problem with PACE being subservient to the mortgage? Most houses do not disappear, so the next homeowner moves in and pays for the solar system, and this continues until it is paid off,even if somewhere along the line a homeowner defaults on his/her mortgage.

Bruce Karney
November 29, 2012

I don't have a problem with unpaid taxes having precedence in foreclosure over mortgage payments. To me, the most dubious part of residential PACE programs are: (1) a "tax" imposed on oneself by a property owner skirts the common-sense definition of what a tax is and (2) I'm told that only the interest portion of a PACE assessment is tax-deductible. This means that in the last few years of the assessment period, only a small portion of the PACE tax payments are deductible.

When PACE was developed in 2007-08, PV systems were very costly and leases and residential PPAs were in their infancy. Those non-governmental financing programs now account for the majority of PV installations in jurisdictions that allow them. At least until the 30% ITC expires, I think PACE programs will only be attractive to homeowners who don't have a high enough credit score to qualify for a lease or PPA.

BUCK SHAW
November 28, 2012

Scott;

I try to look at it this way. Would you loan money to a person who wants to buy a commodity on margin. Then take second payback to the loan? When the commodity can in fact rapidly change in value. Now instead of thinking Pork-belly, coffee or gold. I remind you your home is a commodity also as some of us have found out the hard way... Thats why I side with the first lien holder. Buck

Scott Carlson
November 28, 2012

Bob and Buck, while I some what agree with you, I think a house without a solar electric system is going to be of less worth in the years to come. Since solar throughout the united states is now cheaper than any utility company ( yes you heard right- cheaper long term. modules life span may be in the 250 to 350 year range) I can not understand why we as a nation would allow any government agency to invest in an out dated, less valued, mortgage. I might be standing to high on my soap box so take this with a grain of salt.

BUCK SHAW
November 28, 2012

I agree also, Bob you said it perfectley. Buck....

Bob "The Clean Energy Guy" Mitchell
November 28, 2012

Frankly, I don't blame FHFA for requiring that the mortgage be in a first position. As the recent downturns in the real estate market have demonstrated, property values can drop and people who had a positive equity position and were current on their taxes, can find themselves underwater pretty damn quick! (It happened to me!) Plus, while we tend to be myopic in our consideration of these types of programs, the facts of the matter are that mortgage markets are HUGE and involve thousands of players. These players range from government entities, such as FHFA and HUD, to semi-governmental agencies, such as Fannie Mae, to private entities such as mortgage insurance companies and pension funds. Allowing PACE programs to have a superior lien would require changing the pooling requirements for mortgages and would involve having all of these players to accept a weakening of their security position...something that I don't ever see happening! That said, there should be other ways that the mortgage industry could get behind renewable energy in such a way to make it easier to have renewable energy systems financed, while not endangering their security. Bob 'The Clean Energy Guy' Mitchell

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John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His latest paper,...