Property Assisted Clean Energy (PACE) programs allow homeowners or building owners to finance energy efficiency upgrades through a property tax assessment. This allows a big-ticket purchase to be spread out over several years at a fixed payment. However, PACE programs are being put on hold because of concerns being raised by the mortgage industry.
I first wrote about Fannie Mae and Freddie Mac’s uneasiness about PACE financing programs in March. At the time, these two mortgage giants and others were concerned that the PACE tax lien superseded the bank’s right to repayment should the property owner go into default and the home enter foreclosure.
Property taxes and tax assessments would be paid off prior to the mortgage company receiving any funds. In the case of an energy efficiency upgrade project, which could easily cost tens of thousands of dollars, a foreclosed property with a PACE assessment could cut into the mortgage company’s cut of the proceeds.
This concern has caused PACE programs in California to be put on hold while the details are being sorted out. Programs in San Francisco and Placer County, California, are on hold and millions of dollars in financing are sitting unused while homeowners wait for the issue to be resolved. If the issue isn’t resolved quickly, similar programs in Los Angeles, San Diego and Sacramento County could be delayed.
The hold came after Fannie Mae and Freddie Mac made an official claim that the programs could violate their mortgage rules because of the priority position given to PACE assessments. So now the communities with programs in place are waiting for Fannie Mae and Freddie Mac to review the programs and determine whether they can continue.
At the same time this is happening, some other mortgage companies are requiring that homeowners pay any existing PACE assessments when a property is sold. This counters one of the most popular aspects of the program — the ability to pass on the PACE fee to the new homeowner. If you sell your house, the next owner will take on the PACE assessment. This makes sense because the new homeowner will benefit directly from the upgrades.
However, if you only live in your house for three years post energy efficiency upgrade and are then forced to pay off the assessment completely upon selling, you will not have had the time to recoup the costs of the upgrade through energy savings. This will add a barrier to selling the home, as you will now need to sell it for a premium. In a burst housing market, this makes selling the home that much more difficult.
The halt of these programs is a sticky situation for communities and organizations that work to promote PACE programs across the country. In theory, the ability to finance an energy efficiency upgrade over an extended period of time sounds ideal. However there are obviously some issues that need to be addressed with the mortgage companies before these PACE programs can be continued.