Setting the PACE: New ways to invest in clean energy home improvements for low and moderate income Americans
The White House announcement this week on Residential Property Assessed Clean Energy (PACE) is a welcome solution to a problem that has plagued states since 2010. It will go far toward helping all citizens, but especially those on a low and moderate income, to make efficiency improvements to their homes and lower their energy bills.
A little history. In 2008, Colorado and California passed the first PACE legislation – allowing households to finance energy improvements on their homes through a simple assessment on their property tax bill. The revenue collected was bonded to finance the energy improvements creating a seamless and easy process for homeowners. Shortly after, 30 states followed with their own PACE legislation. Programs began exploding around the country.
In 2010, the Federal Housing and Finance Agency issued a letter saying that Fannie Mae and Freddie Mac could not guarantee mortgages on homes that included a PACE loan. While states had structured their PACE programs in different ways, some states had made the PACE assessment senior to the mortgage, similar to other property tax assessments. In a review by the Lawrence Berkeley National Lab in 2010, the authors concluded:
“Typically, the tax liens created by assessments are senior to other obligations, like mortgages, and must be paid first in the event of foreclosure. Fannie Mae, Freddie Mac, the FHFA and other financial regulators reasoned that PACE assessments were, in effect, loans not assessments and so violated standard mortgage provisions requiring priority over any other loan.”
This action by the FHFA effectively stopped this successful policy in one pen stroke.
Since then, the Obama administration has been working with financing experts, the FHFA and other stakeholders to try and solve this thorny problem. The new FHA guidance issued this week clarifies that the PACE assessment does not take first lien position ahead of a mortgage and that the assessment transfers with the property itself. It also requires home appraisers to factor in PACE-related improvements in the value of the property. This clarity is the linchpin that states and municipalities needed to begin, once again, offering a valuable service to their residents.
While most households in the United States spend four percent of their annual income on energy, low-income households typically spend 17 percent. Furthermore, their level of income often flags them as a credit risk to lenders. By using PACE, there is not only an easy mechanism for households to reduce their energy costs, the assessments that have been issued have less than a 2% default rate. Being a part of a successful lending program like this can help to raise credit scores of low income citizens. Furthermore, the competitive rates at which PACE programs can finance provide optimum savings for low income families – allowing them to focus their limited resources on other family needs.
To assist state decision makers in analyzing their policy options across 38 different clean energy policies (including Residential PACE), the Center for the New Energy Economy and The Nature Conservancy have launched the State Policy Opportunity Tracker (SPOT) for Clean Energy. This new resource is a 50 state policy gap analysis where we look at what best practices states have in place and what they are missing. SPOT points out where the Residential PACE state policy gaps remain and we also describe the key elements for any PACE program in a short memo.
This week’s announcement is a key step in a just transition to clean energy for all Americans. State policymakers should make every effort to enable this program for their citizens.
Bill Ritter, Jr.
41st Governor of Colorado
Director, Center for the New Energy Economy