FHFA strangles PACE clean energy financing program
Yesterday, the Federal Housing Finance Administration, the agency that regulates bankrupt mortgage insurers Fannie Mae and Freddie Mac, issued a letter effectively destroying the promising energy efficiency and renewable energy financing program called Property Assessed Clean Energy (PACE). I blogged about Fannie and Freddie’s lender letters on the PACE program a few weeks ago. PACE operates as a traditional local government assessment on properties: governments raise money from the bond market, use the capital to finance energy efficiency retrofits in buildings that pay for themselves with reduced energy bills, and repay the bondholders through property tax assessments that cover a period of time equal to the life of the property improvement.
FHFA’s letter urges state and local governments “to reconsider these programs and continues to call for a pause in such programs so concerns can be addressed.” The agency also directs Fannie and Freddie to protect themselves from properties with PACE assessments, imposing conditions that make PACE assessments either too expensive or impossible to obtain.
Why? FHFA describes these tax assessments as “loans” that are “unlike routine tax assessments and pose unusual and difficult risk management challenges.” But the agency couldn’t be more wrong. PACE operates exactly like traditional local government tax assessments and poses minimal risk to lenders. For example, in the event of a foreclosure, only the delinquent PACE payments get repaid ahead of the mortgage and not the entire value of the assessment. A typical delinquency period might be 18 months, equivalent to $1500 on a $20,000 PACE assessment over 20 years. Furthermore, most PACE properties will likely see an increase in value given the enhanced marketability of a more energy efficient and renewable energy-equipped building.
FHFA also claims that PACE programs “do not have the traditional community benefits associated with taxing initiatives.” But how much more of a benefit could a community get than reducing its dependence on imported energy and decreasing hazardous air pollution and greenhouse gas emissions from fossil fuel power plants?
The New York Times and the San Francisco Chronicle have already run stories decrying federal regulators’ position on PACE. Most likely there will be further negotiations with FHFA, but the line is now drawn. Perhaps a lawsuit will be necessary to undue this damage, as the FHFA decision threatens to undermine state sovereignty to grant local governments power to legislate in the public good.
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About Ethan
Ethan Elkind is the Director of the Climate Change and Business Program, with a joint appointment at UC Berkeley School of Law and UCLA School of Law. In this capacity, h…
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This is good news because PACE projects almost catagorically fail to their energy conservation projections and cost savings, thereby becoming an economic burden on home owners and taxpayers. This is a fake “clean energy” program that only benefits government employees and their contractors. PACE wastes taxpayer money during a slow economy which only adds to unemployment and more misery for ordinary citizens who are not on the government dole.
Everything BQRQ writes here is incorrect. First, taxpayers pay nothing for PACE programs. All revenue for the program comes from private sources (bondholders), and administrative fees are taken out of that pool of funds. Second, there are no “government contractors” with PACE programs. Private building owners enroll in the PACE program through an application process, and once approved for PACE financing, these owners enter into agreements with private contractors. Sonoma County, for example, demonstrated higher employment in the construction sector as a result of its PACE program, bolstering the case that PACE programs are important economic drivers and creators of local jobs that cannot be outsourced. Third, PACE projects do not “categorically fail” to deliver energy savings. PACE application processes require, per DOE guidelines, that the PACE-financed project will result in more energy savings over the life of the PACE assessment than the assessment itself. In some cases, this is easy to determine, such as with solar panels that have fixed costs and quantifiable means to pay for themselves over time through net metering programs. In other cases, such as with energy efficient retrofits, it can be more difficult to quantify, but qualified energy auditors can do a good job projecting the energy savings. And ultimately it is up to the building owner to take the risk, because if the contractor or energy auditor does a bad job, the property will lose value upon resale, hurting the owner and not anyone else.
Interesting discussion on the pace program