In the case of the federal government overreach on property assessed clean energy (PACE) financing — this overreach — Fannie, Freddie, and the FHFA (Federal Housing Finance Agency) took issue with the fact that the PACE lien on the property is senior to the mortgage. To recap, a senior lien is the thing that really gives PACE its value and is well explained here.
Specifically, Fannie, Freddie and FHFA assert that PACE financing is a loan – loans that get senior lien status over the mortgage contract. And it’s no surprise that these lending organizations don’t like being second in line when it comes time to pay loans back.
Fair enough, but PACE is not a loan at all. The programs make innovative use of a well-proven, low-risk finance mechanism called a “special assessment district.” That distinction is not just semantics. Loans are the rightful purview of Fannie, Freddie and the FHFA, while special assessments fall under the jurisdiction of local government.
For over a century, municipalities and states have used special assessments to fund improvements that benefit the public good. Today there are 37,000 special assessment districts across the U.S. helping build everything from sewage systems to streetlights. PACE uses that same authority to finance energy efficiency, solar, water conservation, and other green retrofits on private property. All special assessment districts rely on tax liens that are senior to the mortgage loan; PACE districts are no different.
When a county uses an assessment to pay for a new sewer system, the FHFA does not raise the alarm. Fannie and Freddie do not punish the neighboring homeowners for the additional tax now levied on the property. And yet these groups have targeted PACE, a model that delivers *additional* benefits in the form of lowered energy bills and increased local green economic activity.
Advocates have long asserted that the senior lien argument did not hold water. It has been carefully documented that a lien being superior to the mortgage in this instance is not a threat to the mortgage holder in a significant way:
If homes with PACE assessments are foreclosed, in most states, the mortgage holders would have to repay the County only the back tax lien payment. This is because in a foreclosure, most state laws provide that the assessment lien is not ‘accelerated’ at foreclosure or transfer. Only delinquent assessments are due, not the entire lien. The next property owner will inherit the remainder of the PACE assessment.
Thus even If 10% of PACE homes in a portfolio went into foreclosure (national foreclosure rate is under 5%) with an average $20,000 lien, the average loss to the mortgage holder would be $170 per property.
– Page 14 of this presentation
All that is to say, PACE’s senior lien does not pose a significant risk.
And now we have some evidence that having a subordinate lien strips away PACE’s value. The early reports out of Maine, a state that passed a PACE law with a subordinate lien, are that it’s most recent RFP for PACE programs yielded ZERO bidders. That is not encouraging news.
So, we have to reiterate, the FHFA should think about stepping out of the way and letting these programs proceed in a way that will work for America.
Vote Solar is a non-profit grassroots organization working to fight climate change and foster economic opportunity by bringing solar energy into the mainstream.
