August 2010

Volume 19, Number 8

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Article Contents

Mortgage Policies Threaten PACE Programs

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This solar panel installation is a typical clean energy improvement that PACE programs can help fund.

Photo: Wayne National Forest

A growing method for financing clean energy investments known as PACE (property assessed clean energy) has hit a serious roadblock in the form of Fannie Mae and Freddie Mac. The two lenders together dominate the secondary mortgage market in the U.S., and both are concerned that PACE liens will increase their liability in the case of foreclosure or default.

PACE adopted in 22 states

PACE first took off in California in 2008 and has since been adopted by 22 states in some form. Through the programs, local governments borrow funds, mostly through bonds, which they then distribute to property owners making energy efficiency renovations (see "PACE Financing for Energy Improvements", EBN Mar. 2010). Such programs make it affordable for property owners to invest in renovations because they pay for the lien over 5–20 years through their property tax bills instead of through a shorter-term loan; the lien stays with the property if it is sold. The U.S. Department of Energy (DOE) has set aside $150 million in stimulus funds to help cover setup and administrative costs in states that have implemented PACE programs.

PACE has gotten a lot of attention in the residential sector, but it’s also a growing force for commercial properties. A new report published by Pike Research, “PACE Financing for Commercial Buildings,” projects that PACE programs will continue to grow in the commercial sector over the next five years. Under a baseline forecast scenario in the report, $2.5 billion will be invested annually in financing for commercial properties through PACE by 2015. This investment would create 50,000 new jobs and prevent 8 million metric tons of carbon dioxide emissions. Alternatively, under an aggressive market forecast scenario—which accounts for federal and state legislative backing of PACE—those amounts would be at least tripled.

Lenders may put brakes on PACE

The big question for PACE, though, is how it will fare under scrutiny from lenders. When homes go into foreclosure, property taxes must continue to be paid by the lender. If those taxes incorporate PACE financing, those payments would be included, thus increasing the liability of lenders backed by Fannie and Freddie. Apparently concerned about this issue, vice president Patricia J. McClung of Freddie Mac recently issued a memorandum noting that “an energy-related lien may not be senior to any mortgage delivered to Freddie Mac.”

Banks are now reluctant to work with properties using PACE programs, noted Bert Gregory, FAIA, CEO of Mithun. “The issue for all the banks is being in second position. Nobody wants to be in second position on anything,” he said. Many homeowners have put their PACE plans on hold, anticipating that mortgage lenders backed by Fannie and Freddie will demand energy liens be paid off before issuing new loans. “This problem may be one that can be solved only through regulation, at the end of the day,” said Gregory.

In California, where PACE funding originated, Attorney General Jerry Brown has filed a lawsuit against Fannie Mae and Freddie Mac to, in his words, “stop the regulatory strangulation” of PACE programs. With PACE stalled, California could lose $100 million in federal stimulus money and thousands of jobs, according to Brown.

– Emily Catacchio

For more information:

“PACE Financing for Commercial Buildings”

Pike Research

“First Lien Mortgages and Energy Efficient Loans”

Freddie Mac

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July 30, 2010