Ten months ago, PACE looked like a sure thing. Now Property Assessed Clean Energy financing is fighting for its life.
What explains this turn of fortune? Certainly lobbying played a role. So did regulatory cold feet. The question now is whether Congress, which filed its first pro-PACE bill on Thursday, will come to the rescue. Or will PACE's future be decided in court?
The tables first turned against PACE in May when Fannie Mae and Freddie Mac barred lenders from writing mortgages for PACE homes. PACE programs, which allow homeowners to borrow money for energy-efficiency improvements, raise money through government-sponsored bonds and allow homeowners to repay the money through special assessments on property tax bills. The mortgage giant had initially been supportive of the program, but changed its mind and complained the assessments, or liens, took priority over its mortgages in the event of defaults.
The second major blow came early this month when the mortgage regulator Federal Housing Finance Agency released a list of specific PACE concerns. The agency took issue with PACE's first-lien priority, but also argued that the program lacked standards for underwriting, consumer protection and energy remodeling.
The objections sparked lawsuits in California and from the Long Island town of Babylon after most of the PACE programs in 23 states suspended operations.
The reversal on PACE came after months of backroom negotiations failed to budge regulators. Supporters say they offered numerous concessions, including an offer from the White House to cover any PACE loses during a trial period. The offer was rejected.
Several people following the inner workings of the PACE debate says lobbying was fierce, particularly fromsolar-power financier SunRun, which passed around a white paper calling PACE loans unconstitutional. The Mortgage Bankers Association was equally active, both on the federal and state levels.
"I believe there were lobbyists involved" in the FHFA and Fannie Mae decisions, says Gary Kremen, an entrepreneur who founded Match.com and Clean Power Finance, a company developing software for solar installers.
SunRun declined to discuss its role in the lobbying effort.
But not everyone is convinced. Mortgage regulators maintained an almost "ideological" disposition against ceding a priority lien position to PACE, according to several people close to the negotiations. Anything adding mortgage risk seemed anathema, especially in today's environment of toxic mortgage assets and high foreclosures.
The issues they raised were not entirely unreasonable, concedes Alex Robinson, founder of GreenDoor, a startup developing software for PACE administrators that suspended operations after the FHFA letter against the program.
But PACE supporters argue the concerns were addressed. In one instance, they offered to put PACE through a 24-month trial period with a cap of up to 270,000 homes. The test would allow administrators to collect information on the program and prove its worth.
The White House also made efforts to limit investments to those homes with the greatest potential for energy-efficiency gains. Further, it proposed guidelines requiring the use of qualified auditors, contactors, and quality-assurance inspectors. The inspectors were to examine a home once work has been completed.
Fannie Mae and the FHFA "raised real issues," says Cisco DeVries, president of Renewable Funding, an Oakland company that administers PACE programs across the country. "But these issues were addressed."
Instead, regulators appeared unwilling to find a middle ground.
The future of PACE now rests with a federal court or with Congress. In California, Attorney General Edmond Brown Jr. filed suit this week claiming Fannie Mae, Freddie Mac and the FHFA are taking away the rights of municipalities to raise money through special tax assessments.
It's a state-versus-federal issue with broad ramifications. A decision against California could hinder special assessments, such as PACE, in the future, says environmental attorney Sanjay Ranchod at Paul Hastings Janofsky & Walker in San Francisco. A decision for the state could do the opposite -- and throw open the PACE floodgates.
Congress also wants to get in on the act. On Thursday, Rep. Mike Thompson (D-CA) introduced the first federal legislation to require lenders to work with PACE. Twenty-nine other House members joined him. With Congress set to recess in August, expect a lot more inside baseball in the weeks ahead.