PACE: Not Dead, Just Sleeping

Following Berkeley’s success, 27 states passed PACE-enabling legislation, clearing the way for local governments to create programs in which:

• The government entity raises funds, ideally from tax-free clean energy bonds;
• Homeowners and business owners can apply to use those funds for renewable energy or energy efficiency installations;
• The solar arrays (for example) are installed at no cost to the owner;
• The owner repays the lending agency through regular property tax assessments over an extended period, e.g., 20 years;
• Should the owner sell the property before the installation is paid for, the balance of the tax assessment is applied to the new owner.

Of course, for every idea that catches fire there’s someone waiting with a bucket of water, and in this case it was the Federal Housing Finance Authority (FHFA), the overlord of Fannie Mae and Freddie Mac. FHFA considered the financial arrangement not a tax assessment but a loan, and thus could not stomach the notion that its mortgage operations would lose their senior lien position to a local authority. Last summer, then, FHFA instructed Fannie Mae and Freddie Mac not to underwrite mortgages for properties with a PACE assessment. Given the large number of home mortgages that end up being sold to these government mortgage agencies, FHFA’s action effectively killed the entire PACE movement.

Fighting Back

Behind the scenes, a lot of individuals and organizations quickly started working to restore this wildly popular program. Rep. Mike Thompson (D-CA) tried to introduce a bill late last year to address FHFA’s concerns and kick-start PACE programs, but it became lost in the usual Congressional December maelstrom. This year his bill, with key modifications, has gathered strength and bipartisan support, and in a different form was introduced in Congress last week.

Characteristically, however, the Green Mountain State didn’t wait for Congress to get its act in gear. During the legislative session that ended in late May, the Vermont legislature passed a bill that has apparently satisfied the FHFA’s concerns, and will become effective on Jan. 1. 

The new law establishes two funds to support PACE programs in the state, neither of which impacts the public purse. One will be fed by a 2 percent fee that participating property owners must pay, while the other will be supported with money from the Regional Greenhouse Gas Initiative that originated as system benefit charges paid by ratepayers. Since the law confirms that liens associated with PACE assessments will be secondary to those of FHFA-backed mortgages, the funds provide a large measure of security for investors in PACE programs. It’s thought by Vermont lawmakers, with the agreement of FHFA, that these funds will be sufficient to guard against potential mortgage defaults; this means that communities across the state can establish special tax districts within which PACE programs can be launched with the blessing of the federal government mortgage agencies.

Moving from Montpelier to Washington, D.C., we find a scintilla of hope in the successor to Thompson’s bill, the newly introduced PACE Protection Act of 2011 (HR2599). The bill, introduced by Rep. Nan Hayworth of New York and co-sponsored by Thompson, Dan Lungren and Lois Capps of California, has picked up another dozen truly bipartisan co-sponsors from across the country. The bill would prevent the FHFA from adopting policies that work against local PACE laws, so long as certain provisions applied to applicants, e.g:

• the proposed energy efficiency or renewable energy installation could not cost more than 10 percent of the value of the property;
• the property owner had more than 15 percent equity in the property;
• PACE-financed projects have positive savings-to-investment ratios.

What’s Not to Like?

It’s too early to tell whether the bill has any chance of passage in the penumbral state of Congressional rationale that drives legislative debate today, but there should be enough points of illumination in it to find favor on both sides of the aisle. PACE programs are not a burden to taxpayers or government budgets, they do not represent government mandates, and they don’t disadvantage any one group in favor of another. They do, however, leverage private capital, create a continuing stream of local jobs, save homeowners money and reduce fossil fuel usage. In short, they come dressed in a mantle of “what’s not to like?”

And that’s a question that must have been pointedly asked of FHFA Acting Director Edward DeMarco last year. We expect it was, in effect, asked by the Department of Energy when they offered FHFA a loan guarantee reserve of $150 million to keep PACE programs alive.  Whatever answer DeMarco gave then, it was ephemeral, for only days later he issued his order to Fannie Mae and Freddie Mac that killed the programs. Yet the answer, as we can see from the details of the Vermont and Congressional bills, was always simple and always within the power of the parties to propose and to accept – a full year ago.  There appears to have been no interest from FHFA’s side in doing either.

It can be agreed that FHFA had legitimate concerns about lien priorities, especially during the current pandemic of mortgage defaults, and wanted to protect its agencies from excessive risk; as Peter Adamczyk of the Vermont Energy Investment Corporation puts it: “PACE has been described as the best possible program introduced at the worst possible time.” But by steadfastly refusing to countenance any negotiated remedy that would allow a program that was favored in most states to continue, FHFA was exhibiting a somewhat more disconcerting mindset: that of not valuing, or even understanding, the importance of what it was killing.

To those of us with some level of understanding of the benefits of renewables, it’s natural to expect to make accommodations and adjustments if we want to see more of them deployed. But if those benefits don’t resonate with you, if they don’t even rise over your visibility threshold, any concern expressed by others must qualify as Much Ado About Nothing. 

It must have been a lot simpler for FHFA management to take the bankers’ approach and see only the fiscal argument than to use a little imagination and accommodate the future.

By doing so, the agency even misread the fiscal argument. The rate of defaults on homes with PACE assessments is less than .08 percent, about one-30th of the national rate. Efficiency upgrades and solar installations lower the cost of living, making owners less, rather than more, likely to default. Put another way, as conventional energy sources become increasingly expensive, homeowners may be put in the position of choosing between making their mortgage payments or avoiding freezing in winter. With “strategic mortgage defaults” becoming more and more a budget management technique of underwater mortgagors, one would think the body responsible for the solvency of Fannie Mae and Freddie Mac would itself have been a little more responsible.

And meanwhile, the PACE Assessment Protection Act of 2011 has at least made it into the House of Representatives and been referred to the Committee on Financial Services. 

You can find out more about PACE, how it works, and its benefits to the nation, property owners, lenders and local governments.  You can also send a message to your Congressperson from this site, calling for a positive vote on HR2599.