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Where Does PACE Financing Stand Today?

Since the Federal Housing Finance Agency (FHFA) announced it wouldn’t be backing PACE loans for residential projects a year ago, the buzz around PACE financing has died down. However, many don’t realize that this development only slowed commercial PACE financing by a small measure. In addition, a new initiative to rework PACE has been making its way through Congress, starting last week, which could revive PACE in the residential sector.

On the commercial side, a number of PACE programs have been and continue to be in operation in states that have passed enabling legislation for PACE financing. Several major cities, including Los Angeles, San Francisco, Washington, D.C., and Cleveland, as well as a number of smaller municipalities including Ann Arbor, MI and Northampton, MA, have enacted legislation to support commercial PACE. Although the specific financing schemes used in each (e.g., pooled bonds, owner-arranged financing, etc.) vary, PACE-backed efficiency projects are underway in the commercial sector despite the lack of FHFA support in the residential sector.

Back in July 2010, the FHFA’s announcement pulled the plug on residential PACE programs on grounds that PACE programs are too risky to back for a number of reasons. One reason is that they add to the number of obligations that homeowners must cover in the event of a default, thereby increasing the inherent risk of default. Advocates of PACE financing, however, argue that PACE financing actually reduces the risk of default because the programs are specifically designed so that utility bill reductions from efficiency and distributed renewable energy, in effect, leave homeowners with more resources for paying debt obligations than they would have without the PACE assessment. Still, FHFA is unlikely to be swayed without regulatory intervention and a more holistic look at the risks – real or perceived – of PACE financing.

The new bill has two main priorities. The first is to resolve one of the key legal questions: Is PACE financing a loan or an assessment? The answer, of course, is that PACE programs, though they provide financing, do not provide that financing via a loan but rather an assessment on a property owner’s property taxes. The main difference (in terms of risk) is that, in the event of a default, the PACE lien would not accelerate. In other words, if the PACE repayment period were originally 20 years but the homeowner defaults in their mortgage in year three, only the first three years’ worth of PACE payments would be due, not the remaining 17. The second priority is to limit or eliminate risk to Fannie Mae and Freddie Mac by demonstrating that PACE neither increases the risk of default nor reduces the ability of homeowners to address all of their debt obligations in the event of a default.

The PACE Assessment Protection Act of 2011 (HR 2599) was introduced in the House on July 20 by Congresswoman Nan Hayworth (R-NY), Congressmen Dan Lungren (R-CA), and Mike Thompson (D-CA). Advocates of PACE are optimistic that PACE’s bipartisan support will help move the bill through Congress over the next few months. Although the outcome is by no means certain at this point, we may see progress on residential PACE in a matter of months.

Article by Eric Bloom, appearing courtesy the Matter Network.