Gov. Jerry Brown is trying to broker a solution to a three-year impasse between advocates of property-assessed clean energy (PACE) finance programs in California and the Federal Housing Finance Agency in Washington, D.C.
In a letter to FHFA Acting Director Edward DeMarco, Brown on Monday pitched a state-backed reserve fund that could be drawn on to ensure energy loans made under PACE programs would be paid off in the event of a mortgage default. The perceived conflict between PACE repayments and home mortgages was the point of contention that triggered the FHFA’s opposition to all things PACE back in 2010 and has slowed the spread of the financing program across the country ever since.
According to the letter, the reserve fund would be set up under the California Alternative Energy and Advanced Transportation Financing Authority, an existing agency chaired by the state treasurer. Officials in the governor’s office said seed money for the fund could come from CAEATFA or Prop. 39, with PACE programs across the state also kicking in small premiums.
FHFA officials said Monday the agency is reviewing the proposal.
If Brown can pull it off, it could be a huge boost for the home retrofit market, which has lagged nationwide primarily because while many homeowners would like to make their homes more energy efficient, they can’t afford the upfront financing.
That was the problem Palm Desert officials tackled back in 2008 when they drafted and helped pass Assembly Bill 811, the first state law creating PACE programs, and launched one of the first energy loan programs in the nation. Basically, the law allows local jurisdictions – cities and counties — to provide upfront financing to home and business owners to install solar panels or other big-ticket energy efficiency upgrades, such as double-paned windows, cool roofs or variable speed pool pumps.
The loans are structured as assessments, similar to the special assessment districts cities or counties may create for the installation of public works improvements such as street lighting or sewers, with long-term repayments linked to homeowners property taxes. The idea behind PACE is that the energy savings from the upgrades will equal if not exceed loan repayments, creating an instant positive cash flow for homeowners, while also increasing the value of their properties.
The fly in the ointment for the FHFA is that because PACE financing is structured as a special assessment, the repayments take precedence over mortgage payments in case of a default. Coming out of the housing crash of 2008, the agency saw PACE programs as a threat to the fragile home mortgage market and in July 2010, issued a letter directing Fannie Mae and Freddie Mac, the federally created, but public corporations that are key players in the home mortgage market, not to provide financing for any home that had a PACE assessment on it.
By the time the FHFA issued its letter, more than 20 states had passed PACE laws, but most put any local programs on hold. Here in California, pioneering programs such as Palm Desert and Sonoma County’s started figuring out work-arounds. The main problem for property owners considering PACE financing is that if they eventually decide to sell their homes, prospective buyers might not be able to get a mortgage.
Sonoma County worked with sellers and buyers to broker appropriate financing arrangements — paying off the PACE assessment as part of the sale agreement — while also tightening up eligibility requirements for homeowners applying for the financing. Sonoma, Palm Desert and the State of California also filed a law suit against the FHFA, which they eventually lost on appeal.
In other states, cities and counties worked around the FHFA restrictions by focusing on using PACE for green upgrades on commercial buildings, an area where the agency has no jurisdiction.
Studies done by PACE advocates also found that energy-efficient homes increased their value and were less likely to default because of the positive cash flow the energy upgrades created. California last year updated its PACE law, allowing cities and counties to create PACE programs under Mello-Roos community facilities districts, which was intended to provide a stronger legal foundation for PACE repayments taking precedence over mortgages in default situations.
None of this has changed the FHFA’s opposition, even as the housing market recovered.
Other parts of the governor’s plan aimed at winning over the agency include a requirement that PACE programs enrolling in the reserve fund meet certain basic structural criteria and comply with underwriting conditions set by CAEATFA. The programs would also be the ones making the payments to Fannie or Freddie in the case of a default or a short sale where there’s a gap between PACE repayments and the sale price, with the fund then reimbursing them.
The particulars of all this will be hammered out as the fund takes shape, state officials said, but they have consulted with current residential PACE programs in Sonoma and Placer counties, along with the popular HERO program established by the Western Riverside Council of Governments.
California Sen. Barbara Boxer, D-Rancho Mirage, followed up the governor’s letter with one of her own, urging the FHFA to work with the state.
“California’s new policy directly addresses FHFA’s previous concerns by effectively removing all risk of loss to (Fannie and Freddie) and taxpayers based on a PACE lien. I am encouraged by California’s approach and ask that you let me know what steps you will take to support the program and ensure that Enterprise mortgages are fully able to participate in PACE programs that enroll in the reserve fund.”
As the Coachella Valley prepares to roll out its own regional PACE program, possibly by the end of the year, a solution to the FHFA problem could be a big boost for the program, removing any uncertainty for homeowners considering applying for a loan.
While the FHFA’s opposition to PACE has yet to result in any legal action or penalties against cities or counties that have started residential programs, most existing PACE programs require applicants to notify their mortgage lender of the loan and to read and sign a disclosure form, going over the FHFA restrictions and their implications for future sales.
PACENow, a national advocacy group, has the most up-to-date information on the current status of PACE programs across the country. As California led the nation in the creation of energy financing programs, maybe now we will aso lead it out of the FHFA stranglehold.