Contractors, homeowners and clean energy advocates across the U.S. are celebrating a much-anticipated Federal Housing Administration (FHA) ruling that takes perceived risks out of a billion-dollar home energy financing vehicle known as PACE (Property Assessed Clean Energy).
The July 19 U.S. Department of Housing and Urban Development (HUD) guidance allows homes with qualified PACE assessments to be refinanced or purchased with FHA-backed mortgage products, affirming the long-held argument that PACE should be treated as any other property tax assessment and not as a traditional loan product.
“Today the [FHA] announced clear guidance that will expand access to renewable energy, energy efficiency, and other home resiliency projects for American homeowners,” Greg Frost, national communications director of Renovate America, said.
With a simple vote of a municipality to enable the program, PACE allows qualifying homeowners to finance 100 percent of renewable energy, energy efficiency, water conservation upgrades with no money down and no FICO score requirements. Financing comes from the private sector and is repaid over periods of up to 25 years via voluntary assessments on homeowners’ property tax bills.
“By allowing PACE assessments to coexist with FHA-backed mortgages, the government is removing an impediment in federal policy that will give greater access to more homeowners in new states,” Frost said.
Currently, PACE in one form or another is enabled — but not necessarily active —- in 32 states and the District of Columbia, according to industry advocate PACENation.
This announcement affords state and local governments the confidence they need to unlock the economic potential of PACE in their respective communities.
On a macro level, PACE sounds almost too good to be true, but it’s been vetted across myriad communities over multiple years. An econometric study conducted by ECONorthwest found that $4 million in PACE funding generates $10 million in gross revenue, $1 million in combined federal, state, and local tax revenue, and 60 clean energy jobs.
It’s a big deal for municipal economic development and sustainability officials looking to increase cash flow, improve aging building stock and meet regional, state and federal water conservation and clean energy mandates using no public monies.
Scientific American’s weighed in, identifying PACE as one of the top 20 “world changing” ideas of all time.
“We are thrilled by [this] announcement and appreciate the hard work that went into producing this guidance,” David Gabrielson of industry advocate PACENation, said in a July 19 statement. “We look forward to continued work with all market stakeholders on solutions that will make PACE available to more homes.”
Even with FHA clarity, not all homeowners will yet be able to realize the benefits of PACE. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has not changed its approach to PACE.
PACE homeowners will continue to receive clear disclosures that they may need to pay off any remaining balance when they sell or refinance — as they would with other asset-backed financing options.
Approval for PACE financing is based on property values — and being current with one’s mortgage lender. Financing is secured via a lien against the improved property, not the homeowner. PACE liens thus transfer with the sale of a property. One major issue is that priority lienholders are not notified — nor are they given the opportunity to object to — PACE financing.
Fannie Mae and Freddie Mac contend that because PACE financing repayments are paid via property tax bills, they subordinate the primary lenders’ place in line — taking first lien position in the unlikely event of a default. (Governments are paid first). In California’s reality, defaults on homes with PACE liens are about half those of households with traditional loans.
Things got so testy that at one point, mortgage lenders were threatening to redline entire communities if PACE improvements were initiated en masse.
Despite the pleas of those who saw the legitimate economic impact of PACE in their communities (and the energy and water savings the improvements facilitate) risk-averse city councils backed down; and many enthusiastic PACE initiatives faltered.
But in California and across the nation, thousands of business owners, environmentalists and policymakers voiced their support for PACE to the FHA and others. California Governor Jerry Brown even established a $10 million loan loss reserve fund to ameliorate lenders’ and municipalities’ lien default concerns. That fund has never had to be tapped.
That confident concession — and PACE providers’ consistent delivery of a quality, customer-focused residential PACE product — has been a boon for California’s energy sector and homeowners. Renovate America’s HERO brand alone generated over $1.4 billion in PACE business, created 12,000 California jobs, drove $2.4 billion in economic stimulus and reduced 2.4 million tons of C02 emissions in the past five years.
“In making the first specific federal housing policy endorsement of PACE, the FHA is recognizing that this innovative form of financing is solving a marketplace failure no other form of financing is solving at scale,” Renovate America CEO J.P. McNeill said.
Adding to HUD’s FHA message, the IRS has just ruled that PACE interest falls within its mortgage deductibility guidelines, i.e., the interest portion of a PACE payment can be treated as a deduction to personal income taxes.
Even with PACE-facilitated improvements to 97,000 U.S. households, 750 commercial/multi-family structures, a documented 20,500 clean energy jobs created and a wildly successful $2.35 billion economic boon in its wake, this FHA ruling confirms that with residential PACE, the best is yet to come.