Amid our financial (economic) travails and a seemingly snail’s pace movement toward a clean-energy future, there have been reassuring bright lights. One of these has been the emergence and spreading of Property Assessed Clean Energy (PACE) programs. (White House PACE policy framework (pdf) Building on experiences such as in Berkeley, California, PACE provides a path for communities to enable faster and greater renewable energy penetration and to encourage energy efficiency efforts. In short,
- Community issues a bond, borrowing money.
- Citizens and local businesses can use that money for energy efficiency and renewable energy investments in their properties.
- The bonds are structured so that savings are greater than the costs to pay back the loans (over a 20 year period).
- The payback is done via the local mortgage taxes.
- The payback is the responsibility of the property owner — and transfers with any property sale (just as the benefits of reduced utility costs move from one owner to the next).
All told, a rather rational and efficient path to leverage community resources (borrowing on a larger scale) to provide low-cost loans efficiently and solving one of the key challenges when it comes to Energy Smart practices: bridging the chasm between upfront costs and (seemingly uncertain) longer-term benefits. (In this case, the uncertainty is magnified by Americans’ propensity to move (frequently): if you only are going to be in your home a few years, why invest in something that might take a decade to pay off?) Again, a rational approach to using communities to provide value to local citizens (both to the direct homeowner due to reduced utility bills but also to other citizens through reduced energy demands and the economic activity created due to these home retrofits).
Doing EE/RE work on the local, community level has a myriad of benefits. One of these, that is rarely acknowledged, is that there is a correlation between energy efficiency and home default rates: the more energy efficient the home, the lower the default rate. There could be any number of reasons for this, including that homeowners who focus on energy efficiency (and renewables) might be ‘more responsible citizens’ or could be seen as having more resources to begin with, but there is something far more basic at play: greater energy efficiency means paying less out of pocket for the same energy services (heating, cooling, lighting, etc …). E.g., while the EE/RE might cost more to buy, they cost a lot less to run, and cost less to own. Benefit of the PACE program is that it leaps past that ‘cost more to buy’ (eliminating this from the equation) and translates the ‘cost a lot less to run’ into cost less to run/cost less to own.
Sadly, the extremely low default rates on energy-efficiency related programs (such as defaults on 10 energy loans of 2200 in Pennsylvania) seems to little relevancy to the nation’s lenders as exemplified in Freddie Mae and Freddie Mac.
The Federal Housing Finance Agency (FHFA — the Freddie overseers) has brought PACE programs to a screeching halt. The issue at hand: if the homeowner defaults, who has primary claim on the home’s value: the mortgage holder or the clean-energy assessment? FHFA has restated, forcefully, their concerns in a 6 July statement.
After careful review and over a year of working with federal and state government agencies, the Federal Housing Finance Agency (FHFA) has determined that certain energy retrofit lending programs present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
Key to FHFA’s discomfort is that PACE is placed ahead of the mortgage holder, is a special assessment of extended duration, and “do not have the traditional community benefits associated with taxing initiatives”. (Note “traditional community benefits” as reducing pollution, reducing stress on the energy system, and creating economic activity are all examples of benefits that could be argued to be ‘non-traditional’.)
In its memo, FHFA highlights arenas of legitimate concern such as “the lack of energy retrofit standards to assist homeowners, appraisers, inspectors and lenders determine the value of retrofit products”. This is, legitimately, a real problem. Having just gone through two home appraisals for a refinancing, neither appraiser gave $0.01 of value for the high-efficiency heating / cooling systems, high-efficiency fireplace insert, solar hot water system, and solar PV system. Paying a fraction of the utility bills of my neighbors, in part because of home EE/RE investments, evidently has zero value for the home value according to appraisers. In the 6 July note, FHFA set conditions that will hinder efforts to pick on the pace with PACE programs, including stricter requirements in terms of loan covenants and PACE programs.
FHFA ends its statement this way:
FHFA recognizes that PACE and PACE-like programs pose additional lending challenges, but also represent serious efforts to reduce energy consumption. FHFA remains committed to working with federal, state, and local government agencies to develop and implement energy retrofit lending programs with appropriate underwriting guidelines and consumer protection standards. FHFA will also continue to encourage the establishment of energy efficiency standards to support such programs.
These words, however, ring false to this reader (and to others … Ethan Elkind at Legal Planet entitled his post: FHFA strangles PACE clean-energy financing program). There were (and are) legitimate reasons for FHFA concern, including capping PACE investments relative to home value and developing meaningful standards for understanding returns on investment. What FHFA has done, it seems, is spike the program rather than demonstrate serious interest in being on the leading edge of an EE/RE renaissance in the American housing market.