Some energy efficiency home upgrades are relatively inexpensive — think switching out all your lighting to compact fluorescents or LEDs. On the opposite side of the spectrum are some very pricey upgrades — solar panels, geothermal heating and the like. A new trend is emerging in this country to help finance these expensive energy efficiency upgrades, PACE loans. Property Assessed Clean Energy (PACE) loans allow homeowners to pay for an expensive upgrade via a property tax assessment that is repaid over a fixed period of time. However, mortgage giants Fannie Mae and Freddie Mac are concerned about this new finance opportunity.
So why would Fannie Mae and Freddie Mac be concerned about an energy efficiency upgrade loan? Simple — the PACE loan debt is first in line for repayment if the homeowner defaults or the home faces foreclosure. In other words, the PACE loan is repaid first, then the primary mortgage debt will be paid. This has managers at Fannie Mae and Freddie Mac concerned. Considering the fact that these two companies account for about half of the nation’s mortgage guarantees, they have a big voice and they want their opinion to be heard.
An article in The Wall Street Journal highlights several concerns about PACE loans:
- Mortgage companies could raise interest rates to account for the increased risk of PACE loans
- Consumers will be adding to their debt load while the housing market is still down in many areas of the country
- Participating municipalities don’t have the resources to underwrite these loans
“In San Francisco, financing can’t exceed 10% of the assessed property value, and homes that are worth less than the outstanding mortgage debt aren’t eligible. Homeowners must be current on all property debt, and the existing mortgage lenders must sign off on any projects of more than $50,000.” Source: The Wall Street Journal
With guidance and financial prudence, I feel that the PACE loans could be beneficial. Their benefits begin with the homeowners upgrading their property and thus increasing their property value but the benefits also extend to the annual energy savings as well as a reduction in the overall amount of energy use in a PACE-funded municipality. This type of creative financing is what is needed to help decrease Americans’ dependency on fossil fuel based energy.
I recently had the opportunity to chat with Cliff Staton, vice president of Renewable Funding LLC, an organization that helps administer PACE programs in participating communities. Although the PACE program requires local political participation, Staton said it was not difficult to get communities on board with the concept of the PACE program. When considering that projects funded with PACE loans can help communities meet reduced greenhouse gas emissions goals, it becomes an even more attractive option to local political leaders.
Although there is approved PACE legislation in more than a dozen states, the program is so new that there isn’t much real-life data to assess. Renewable Funding worked with the city of San Francisco to implement its PACE program, which went live on March 1. The company has done most of the administration and educational work for the San Francisco launch and will continue to work with other communities to implement their PACE programs.
As more PACE programs get online and community residents begin to take advantage of this unique financing opportunity, there will certainly be more hurdles to jump. In the interim, PACE program administrators across the country are hoping that Fannie Mae and Freddie Mac’s concerns can be addressed and that they don’t hinder expansion of the program.