Just when you thought things couldn't get worse, there's more bad news for the home energy retrofit program PACE.
The national mortgage regulator claims PACE (Property Assessed Clean Energy) creates "risk management" challenges and "significant safety and soundness concerns" for mortgage lenders and investors in mortgage securities. The FHFA "urged state and local governments to reconsider these programs and continues to call for a pause in such programs so concerns can be addressed," according to a statement the agency issued on Tuesday.
Response from the PACE community was uniform. "Unless this guidance is changed or Congress overturns it, PACE in the residential sector cannot go forward," says Cisco DeVries, president of Renewable Funding, an Oakland company that administers PACE programs across the country.
"I think it is going to keep things on hold," agrees Ethan Elkind, a climate change research fellow at the University of California, Berkeley and UCLA schools of law. "It makes everything a lot more expensive," including Fannie Mae loans and the bonds that municipalities sell to raise PACE money.
PACE is the experimental retrofit program that has spread to 23 states that allows homeowners and businesses to borrow government money for home-energy improvements. Homeowners repay the money as assessments to property tax bills, and municipalities use the cash to repay the bonds they issue.
California is the largest PACE state, with two-thirds of communities preparing to have programs in place by the end of the year. PACE has been plagued by several challenges since its founding in Berkeley in 2007. For one, managers in municipalities such as San Francisco, which rolled out the nation's largest PACE program in April and now has it on hold, have struggled to keep interest rates low enough to attract residents.
The FHFA statement may pose the greatest challenge. The statement claims the liens PACE loans place on properties distort the mortgage market and strain the finances of Fannie Mae and other lenders, who have to wait in line for their money in the case of default. The statement suggests Fannie Mae and Freddie Mac respond by lending less money or requiring homeowners to have higher incomes.
It also argues PACE programs lack underwriting and consumer protection standards as well as energy retrofit standards to assure that the work being done will reduce energy consumption enough to improve the value of a home.
On this last point, standards do need to evolve, concedes Elkind. But marketplace data are needed to help set them. And without a PACE program, that experience will be hard to come by.
Supporters of PACE say the program's last chance may rest with Congress and with litigation, as state attorneys general argue for a community's right to levy property tax assessments.
"There is strong support in Congress to overturn this decision, and there may well be litigation, so residential PACE isn't dead," says DeVries. "However, it is on life support waiting for an organ transplant."