PACE Initiative Approved In MA But Stalled Because Of Federal Opposition

By: Michael C. Bailey
Published: 08/13/10

The Property Assessed Clean Energy (PACE) initiative has the support of the renewable energy industry and bipartisan support among lawmakers. It’s been approved in 22 other states. It was included in a Municipal Relief Bill signed recently signed into law by Governor Deval L. Patrick.

Yet this program, which is designed to assist homeowners in making energy efficiency and renewable energy improvements, is not available and will not be for the foreseeable future, thanks to the intervention of Fannie Mae and Freddie Mac.

The PACE program enables municipalities to issue bonds to provide funding to homeowners wishing to make their homes greener and more energy-efficient. Homeowners then repay the loan through a betterment charge attached to their property tax bill. If the homeowners sell the property, the new owner takes over the payments.

According to information about the program provided by State Representative Matthew C. Patrick (D – Falmouth), in addition to lowering the homeowners’ utility bills, the PACE programs comes with the added benefit of stimulating the local job market, since the work is performed by local companies.

The program was going to be launched on a 24-month pilot basis this summer, funded by $150 million in US Department of Energy grants. That was aborted on July 6 when the Federal Housing Finance Agency (FHFA) and the Office of the Comptroller of the Currency (OCC) issued a statement stating that PACE would “present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”

The FHFA is the regulator and conservator of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

The concern is over the possible unintended consequences of PACE on “a fragile housing finance market” through tax liens that are “unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors. The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives.”

According to Rep. Patrick, who filed the original bill that was later integrated as an amendment to the final Municipal Relief Bill, the FHFA’s argument that the PACE program lacks widespread community benefit is off the mark.

The FHFA, he explained, argues that the repayment to the town is not a true betterment payment “because it doesn’t help the whole community, but I can argue that it does help the whole community because it puts people back to work in the housing industry, and it saves homeowners money on their utility bills, and they can turn around and spend their savings in the local economy.”

He added that the FHFA is also arguing that lending institutions holding the mortgage for a PACE participant should get first priority on recouping the cost of the tax lien should the house enter foreclosure. “That has never happened before,” Rep. Patrick said, noting that in the case of a traditional betterment charge, the cost is simply rolled over to the next property owner.

Rep. Patrick also disputed concerns that a PACE load holder would be more likely to default on his mortgage, stating that the net savings on energy costs would exceed the increase to his tax bill. Further, he said loan applicants must still meet financial eligibility requirements.

The FHFA also said the PACE program lacks “robust underwriting standards to protect homeowners” and lacks “energy retrofit standards to assist homeowners, appraisers, inspectors and lenders determine the value of retrofit products.”

“Efforts are just underway to develop underwriting and consumer protection standards as well as energy retrofit standards that are critical for homeowners and lenders to understand the risks and rewards of any energy retrofit lending program,” the FHFA said in its statement.

The FHFA reached these conclusions after spending a year reviewing the program in cooperation with federal agencies that helped develop the program, an inter-agency working group that included the department of energy, the US Department of Housing and Urban Development, and Council on Environmental Quality.

Rep. Patrick is one of 109 legislators who signed onto a letter to Congress urging members to “quickly intervene to pass the PACE Assessment Protection Act of 2010, which clearly guarantees local governments the right to assess special taxes for clean energy programs and restore the promise of PACE.”

Both the House and the Senate are considering bill that would override Fannie Mae and Freddie Mac and clear the way for the program to begin in participating communities.

State Senator Robert A. O’Leary (D – Barnstable) and State Representatives Demetrius J. Atsalis (D – Barnstable) and Timothy R. Madden (D – Nantucket) also signed onto the letter.

The Sierra Club last month filed a lawsuit against the FHFA claiming the agency was, according to the Sierra Club’s Executive Director Michael Brune, “overstepping their bounds by preventing Americans from using these programs.”

Mr. Brune added that the FHFA misrepresented the PACE program when it issued a May 5 advisory to lending institutions that “wrongfully mischaracterized the PACE program as issuing ‘loans’,” and told lender “that mortgages for homes participating in PACE programs are not allowed.”

The California Attorney General’s Office and the town of Babylon, New York have also initiated legal action to revive the stalled program.