Agriculture & Energy Committees Update:
Property-Assisted Clean Energy (PACE) Programs


Updated July 20, 2010

BACKGROUND
Property-Assisted Clean Energy (PACE) programs offer the opportunity for homeowners to finance energy retrofits through a loan from the city that is then paid back over time through the property tax bill. This new financing mechanism for energy efficiency retrofits originated in Berkley, California and gained momentum on the national front through the American Recovery and Reinvestment Act (ARRA). ARRA repealed a provision that had limited the use of Investment Tax Credit (ITC) for projects that also subsidized energy financing (a distinction PACE likely fell under) which opened the door for state policies to move forward. In addition, the White House, via the Recovery Thorough Retrofit program, announced a PACE-based financing initiative for competitive grants under the Energy Efficiency Conservation Block Grant Program (EECBG).

PILOT PROGRAMS FACE CHALLENGES
As the U.S. Department of Energy (DOE), states and localities moved forward with these pilot programs, questions began to be raised about the implications of the financing for homeowners with existing loans. In particular, a May 5, 2010 letter from Fannie Mae and Freddie Mac that categorized PACE financing commitments as a loan indicated that "the terms of Fannie Mae/Freddie Mac Uniform Security Instruments prohibit loans that have senior lien status to a mortgage." For homeowners participating in PACE financing with existing mortgages held by these enterprises the implications of the letter were that they were in jeopardy of being in violation of the terms of their mortgages.

The uncertainties raised by this letter resulted in numerous efforts to achieve clarity about the status of the program at the federal level. An example of these efforts includes a letter from Chairmen Henry Waxman (House Committee on Energy and Commerce) and Barney Frank (House Committee on Financial Services) to the heads of the of the relevant federal agencies involved (Treasury, Department of Energy and Federal Housing Finance Agency) urging a quick resolution to the issue. Cathy Zoi, Assistant Secretary of Energy Efficiency and Renewable Energy (EERE) at DOE, wrote to the Federal Housing Finance Agency (FHFA) seeking clarification on guidance for experimental PACE pilot programs funded by the Recovery Act. The May 24th letter also asks for a “safe harbor” confirmation for existing PACE-financed property owners.

In a July 6th statement issued by the Federal Housing Finance Agency (FHFA) the agency made clear that PACE programs which establish a senior lien status do not meet the financial requirements of federal mortgages issued by Fannie Mae and Freddie Mac. While FHFA acknowledged that not all PACE programs establish such liens, it stated that in those programs that do are “unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors.”

ON THE HORIZON
While the FHFA policy statement hampers both the ability of homeowners to use PACE financing programs and the development of new programs, it is unclear if this is the final word on the issue. Proponents have already begun to appeal to Congress to intervene on the issue and provide a legislative fix. In addition, California Attorney General Edmund G. Brown Jr. (D) on July 14 filed a lawsuit against Fannie Mae and Freddie Mac, accusing the government-sponsored home financing firms of hampering the state's effort to encourage homeowners to make their properties more energy and water efficient (California v. Federal Housing Finance AgencyN.D. Cal. 10-cv-03084 7/14/10)

RESOURCES


For more information please contact: Max Behlke (Max.Behlke@ncsl.org) or
Tamra Spielvogel (Tamra.Spielvogel@ncsl.org) or call NCSL’s Washington DC office (202) 624-5400.