When Charlie Yarbrough, a Santa Rosa, Calif., software engineer, decided to put solar panels on the roof of his newly purchased home, he took advantage of a novel funding program known as PACE, short for property assessed clean energy. Working with local installers, he was able to borrow the $25,000 cost at the equivalent of 7.25 percent annually from the Sonoma County Energy Independence Program, a pool of public money, to be paid back over 20 years with his property taxes.
Yarbrough estimates the solar panels have cut annual power costs for his three-bedroom, 1,800-square-foot home by $1,000, while boosting by $40,000 the value of the home he bought for $300,000 in 2009. As energy costs rise in coming years, he expects his savings will grow. “Back of the envelope, this is like a 4 percent loan for an improvement which is the right thing to do,” he says, factoring in the energy savings and property appreciation.
Now, it looks like Yarborough and thousands like him got in just under the wire. PACE all but ground to a halt last July in the wake of the housing bust and mortgage crisis. The Federal Housing Financing Agency (FHFA) — which oversees Fannie Mae and Freddie Mac — characterized PACE as a threat to existing mortgages. It was a signal to banks that the housing finance giants, which together buy and resell the majority of U.S. mortgages, would refuse to buy any mortgages with PACE financing attached. Simultaneously, the Office of the Comptroller of Currency issued similar guidance, further chilling lending activity.
FHFA contends that PACE increases total housing costs, and the loans amount to a lien that is superior to a private mortgage. In the case of a mortgage default, according to FHFA, the PACE loan would have to be paid back first, increasing the risk to lenders. FHFA’s ruling means that homeowners have to pay off the full balance of PACE financing before selling their home to a buyer with a mortgage backed by Fannie or Freddie. That’s bad news for Yarbrough and 2,000 or so other homeowners who have tapped into PACE plans to date. “FHFA’s decision killed PACE programs on the vine,” said Jackson D. Morris, senior policy adviser in the Energy and Climate Center at the School of Law at Pace University in Albany, N.Y.
PACE advocates say that rather than increase the risk of default, the program lowers total housing costs through energy savings and also boosts property values. “FHFA made their ruling without evaluating the real financial impact of these investments,” says Greg Hale, a senior financial policy analyst at the Natural Resources Defense Council (NRDC) in New York.
Started in California
PACE, pioneered in 2008 in two California towns — Berkeley and Palm Desert — adapted a public finance method long used to fund such things as sidewalks and sewer systems. A municipality or county issues bonds and uses the proceeds to improve public works. The twist is that the funds go to qualified applicants to pay for long-term upgrades such as solar panels, insulation or a new furnace. The loan remains attached to the property, not the borrower, so if a home changes hands, the new owner is responsible for the extra charge on property taxes.
Over the past two years, 23 states and the District of Columbia authorized such programs, which are designed to be revenue neutral for the municipality and spur housing investment. About a half dozen PACE programs have been funded with some $50 million of municipal bonds. As part of the economic stimulus package, the Obama Administration approved some $150 million to help fund staffing and training to nurture PACE programs nationally. Early last year, the Energy Department issued guidelines to help communities develop these programs, set standards to qualify homeowners and avoid over-borrowing. “This is a non-ideological approach that boosts renewables and improves efficiency,” says Cisco DeVries, president of Renewable Funding in Oakland, Calif., and one of the original architects of Berkeley’s plan.
The FHFA has been mum since its July rulings and a spokesperson declined to comment for this article. Hale says top FHFA officials appear to be split between fiscal hawks, determined not to risk disturbing the delicate process of restoring mortgage markets, and those who see the merit of boosting housing values with green investments.
According to Hale’s analysis, if PACE financing were to reach 3 percent of U.S. homes over the coming decade, the program would spur an estimated $50 billion worth of construction activity and housing investment across over 3 million homes. “Even if PACE were to incrementally boost default rates —which is unlikely — the added economic activity hugely outweighs those costs,” says Hale. “This is a very low cost way to get the construction sector back to work.”
With a new Congress convening, advocates are pressing their case for PACE as well-suited for fiscally conservative, environmentally anxious times. A bill introduced last year by Sen. Barbara Boxer, D-Calif., and Rep. Mike Thompson, D-Calif., would have required Fannie Mae and Freddie Mac to treat properly-structured PACE loans like other tax assessments, such as those for the construction of sewers, street lighting and sidewalks. The bill died in committee at the end of the last Congress and would have to be introduced.
Since July, seven lawsuits have been filed challenging FHFA’s policy. The plaintiffs, including NRDC, Sierra Club, the state of California and several towns and counties, argue that the agency, Fannie and Freddie failed to consider the benefits of PACE. The cases also contend that the agency issued a rule without a standard period of public evaluation.
Last month, a federal judge in California declined to grant a preliminary injunction against FHFA but suggested plaintiffs file a request with the court to require the FHFA to conduct a more detailed public review process. That would give PACE supporters up to 180 days to argue against FHFA’s reasoning that PACE programs threaten mortgage markets and don’t offer valid public benefits.
A legislative fix may be the best hope for PACE’s backers. Even if green energy programs face tough times in the new Congress, PACE may be able to win support from fiscally conservative lawmakers. “It's revenue neutral, plus it creates unexportable jobs and improves our energy security,” says Salo Zelermyer, an energy analyst at Brace Giulliani, a D.C. law firm and corporate lobbyist. “That’s something both parties can love.”
Related Links:
Funding for Clean Energy is Running Out of Juice (The Fiscal Times)
Broken Housing Market Hinders Economic Recovery (The Fiscal Times)
How China Outguns the US on Clean Energy (The Guardian)