Guest post by Eric Jamison, Clean Energy Fellow with the Great Lakes Environmental Law Center.
The Federal Housing Finance Agency (FHFA) just halted residential PACE programs around the country by issuing a letter stating that PACE programs present “significant safety and soundness concerns” to the lending community. The residential programs that were emerging have all stopped operating their programs.
PACE programs provide a voluntary tool for municipalities to promote the adoption of renewable energy (RE) and energy efficiency (EE) upgrades. The program addresses two major obstacles to wide-spread adoption of RE and EE: upfront capital and a relatively long payback period. This is how the program works: revenue bonds are sold, the funds are made available to consenting homeowners to make RE and EE improvements to their home and the amount used is paid back on the property tax bill over a number of years. The money that is paid back is used to satisfy the bond obligation. The programs are designed to be cash positive so that the improvements save more money per year than they cost in increased property taxes. If the property is sold before the assessment is paid in full, the pay-back obligation transfers to the new owner. For more info, see the Great Lakes Environmental Law Center’s PACE webpage.
The FHFA letter basically ignores that fact that there are over 37,000 financing districts already in operation around the country. The existing districts are used to pay for projects such as parks, sewer systems or sidewalks, and are a regular part of the underwriting process. The major difference is that PACE programs are designed to be cash positive so that the improvements save more money per year than they cost in increased property taxes. So in a time of declining home values and increasing foreclosures the FHFA decided to curb a program that is designed to improve the value of a home and make it more affordable. The program also creates local jobs, reduces dependence on foreign sources of energy, and reduces pollution. The Department of Energy released guidelines for best practices to protect homeowners, lenders and municipalities. The best practice guidelines already address legitimate lending concerns, preventing property owners who are underwater on their mortgages from participating and discouraging unwise investments like putting $30,000 solar panels on a $60,000 home.
The market for PACE programs was beginning to get traction as a number of municipalities have programs up and running and more than 20 states have passed legislation in the last two years to allow such programs. The Obama administration has just committed $150 million to fund programs across the country.
Despite the FHFA letter, commercial PACE programs may be a viable option. Commercial properties may have alternative financing arrangements that are not available for small residential properties.
There may be Congressional action to pass legislation authorizing PACE programs to move forward, though the timeframe is very uncertain. While it will be unpopular with the banking lobby, it should get substantial support because of the local jobs it will create and the positive impact it will have on the affordability of homeownership.
The worst environmental disaster in US history is unfolding in the Gulf of Mexico and serves as a poignant reminder that the costs of using fossil fuels is much higher than $2.95 a gallon. We need policies and programs in place that allow people to adopt RE and make EE upgrades to their properties. If the right policies are in place to favor RE and EE then the private market will invest the capital resources to make the US a leader in the emerging clean technology market. If we fail to act with pragmatic policies to promote clean technology then the technology will be developed overseas and we will be importers instead of exporters. We need the federal government to be supporting solutions, not standing in the way of them.
Update: California Attorney General Edmund G. Brown Jr. has filed lawsuit on behalf of the state of California against FHFA in the U.S. District Court for the Northern District of California. California’s complaint contends that FHFA is “misrepresenting” the nature of the PACE programs and municipal financing in violation of California law, and further that FHFA failed to consider the environmental impacts of its decision in violation of the National Environmental Policy Act.