Fannie and Freddie question PACE

PACE loans can fund home energy efficiency.

Questions around the viability of a popular mechanism for financing home energy efficiency retrofits is creating tension nationwide.

Property Assessed Clean Energy (PACE) assessments allow homeowners to finance energy efficiency retrofits via a low-interest rate from the government, and then repay the loans via their property tax payments. Unlike most loans, it stays with the home when it’s sold. The model, which originated in Berkeley, Calif., in January 2009, has spread to many progressive cities and is up for consideration in many more. 

But in May, Fannie Mae and Freddie Mac raised concerns over one detail of the model: In the case of default, the lender of a PACE loan is paid before the holder of the mortgage. Such “senior” liens prohibit Fannie and Freddie from purchasing such loans. And with Fannie and Freddie guaranteeing half the nation’s mortgages, it is already derailing the PACE model.

A popular program in Boulder, Colo., has already been temporarily suspended. Others are still accepting applications but are not currently approving new financing, according to Cliff Stanton, vice president of marketing for Renewable Funding which administers GreenFinanceSF, a PACE program in San Francisco.

Although relatively new, PACE programs have become very popular in a short period of time. Berkeley's program was over-subscribed almost immediately. Since then, 13 states passed legislation enabling PACE financing and two more are considering it.

Fannie and Freddie’s actions could have a chilling affect on how the investment market views PACE financing, says Jules Bailey, principal of Portland-based Pareto Global and co-author of a report called "Energizing Cities: New Models for Driving Clean Energy Investment," released in June by Seattle-based Climate Solutions. However, it is not the only, nor is it necessarily the best, mechanism for financing energy efficiency loans, he says.

Senior liens have about 10 percent higher administration costs than on-bill financing, or adding loan payments to energy bills, Bailey says. With interest rates for on-bill financing—which like PACE loans usually range from $5,000 to $10,000—between 4 percent and 5 percent right now, payback costs could be comparable. On the other hand, transferring a secondary lien from a seller to a buyer "can be cumbersome," Bailey says.

"When you’re looking at a $10,000 loan in relation to a $250,000 house, $10,000 as part of that larger package isn’t a huge risk to a banker," he says.

Stanton of GreenFinanceSF says there are numerous agencies, including the White House and U.S. Department of Energy, working to protect both lenders and consumers.

The Federal Housing Finance Administration, which oversees Fannie and Freddie, says it will issue further clarification for lenders regarding the potential for Fannie’s and Freddie’s purchasing of loans that include PACE financing liens soon.