Originally published on the ECOreport.
In 2007, the City of Berkeley came up with an innovative program to hasten the adoption of solar technology. Homeowners could finance installations through their property taxes. Scientific American called it one of the top 20 “world-changing” ideas of the year. Unfortunately, the United States was going into a recession that started in the real estate sector. Fannie Mae and Freddie Mac felt threatened by the fact Property Assessed Clean Energy (PACE) loans were tax assessments, which take precedence over mortgages if there is a default. Their refusal to issue mortgages to homes in the PACE program severely hindered development outside of California. Now, that has changed — the Federal Housing Authority (FHA) is developing the guidelines under which it will accept PACE funding. PACE will be available to all US homeowners.
A National Clean Energy Priority
“Today, PACE became a national clean energy policy priority,” said Cisco DeVries, CEO of Renew Financial and the inventor of that original Berkeley program. “PACE financing has the ability to dramatically accelerate our transformation to clean energy. Perhaps even more importantly, PACE is an invaluable tool to help homeowners pay for energy upgrades that will reduce their energy costs. However, until now, regulatory uncertainty has limited the expansion of PACE financing for single-family homes.”
In a press release issued today, Ed Golding, Head of the FHA, acknowledged the value of this program:
“PACE allows homeowners to benefit from the improvements immediately and spread the cost over time. When the property is sold, the PACE loan may transfer to the next owner who is responsible for repaying the loan. The ability to transfer the loan to the new owner allows for both the payment and the value of the retrofit to be transferred from one owner to the next.”
The FHA also described the minimum conditions under which they will recognize PACE loans:
- Lien Position: Only PACE liens that preserve payment priority for first lien mortgages through subordination;
- PACE Payment, Structure, and Term: PACE financing must be a fixed-rate, fully amortizing loan;
- Eligible Properties: PACE assessments must be attached to single-family properties, as defined by FHA, which are 1- to 4-unit dwellings, including detached, semi-detached, and townhome properties;
- Equity Requirement: PACE liens that preserve payment priority for first lien mortgages will be eligible for financing that does not exceed FHA’s maximum combined loan-to-value (CLTV) ratio;
- Record Keeping: PACE liens must be formally recorded and be identifiable to a mortgage lender through a title search;
- Additional Consumer Protections: PACE programs must comply with applicable federal and state consumer laws and should include disclosures to and training for homeowners participating in the program.
Most PACE programs will need to make some changes to take advantage of these requirements. Renovate America’s HERO Program is the only PACE program that currently offers a subordinated product. As such, Renovate America is the PACE provider that can take advantage of the new guidelines starting immediately.
Early Deployment In California
Up until now, the vast majority of residential PACE projects have been carried in California where companies like HERO PACE, Ygrene PACE, and California First are flourishing.
California’s deployment was given a boost in 2014, when the state developed a PACE reserve fund it designed to protect mortgage lenders — including FHA and the Government Supported Entities Fannie Mae and Freddie Mac — in the event of a default on a property with a PACE lien.
There has not been a single claim, though more than 5,000 PACE projects have been completed since then.
America’s Fastest Growing Renewable
Meanwhile, largely without the help of PACE, solar energy has become America’s fastest growing renewable. There are more than 174,000 people working in this sector today. Now that PACE is being made available to the rest of the United States, this sector is bound to grow even faster.
“Today’s win-win announcements strengthen our nation’s security with clean, reliable, domestic renewable energy while driving billions of dollars in private investment into communities that need it most,” said Rhone Resch, president and CEO of the Solar Energy Industries Association (SEIA).
“This is a significant step forward for PACE, as it unites national renewable energy and water and energy efficiency objectives with federal housing policy objectives. We are pleased the White House and FHA recognize PACE as ‘an innovative mechanism’ and enshrine in federal policy today a core principle of the program: ‘When the property is sold, the remaining PACE loan stays with the more energy efficient property and the next owner is responsible for repaying the loan,’ ” said J.P. McNeill, CEO of Renovate America, which has financed more than 40,000 Californian programs through the HERO PACE Program.
(Photo Credits: Clean Power Finance: Mike Stough – courtesy SEIA; SES-Yingli – courtesy SEIA; SolarCity in Arlington, TX – courtesy SEIA)