This solar news story is another update in the ongoing saga concerning the decision by mortgage giants Fannie Mae and Freddie Mac to block the green energy financing program known as Property Assessed Clean Energy, or PACE. PACE programs make it much easier for homeowners to install solar energy systems by allowing them to put the cost of installing the solar panels on their property tax bills and paying the assessment over a long-term period.
Yesterday, The Wall Street Journal reported that California Attorney General Jerry Brown is initiating a "major action" against Fannie, Freddie, and the Federal Housing Finance Agency, which regulates the two lenders, for announcing in May that they will no longer issue mortgages on properties with PACE loans. Due to Fannie and Freddie's predominance in the mortgage market, private lenders have followed suit. Not surprisingly, then, all PACE programs have been suspended as of last week, when the FHFA formally endorsed Fannie and Freddie's disapproval of PACE.
This turn of events has been particularly unsettling in California, where two-thirds of the state was scheduled to have working programs by the end of the year, according to Green Tech Media. California officials had hoped that the PACE program would help generate up to $1 billion in new projects and create up to 20,600 jobs in the construction industry, which has been hit hard by the economic downturn.
The concern expressed by Fannie and Freddie is that the repayment of the PACE loans have priority over mortgage loans, which means mortgage holders take a back seat to PACE bondholders if the property ends up in foreclosure. City and state governments, however, reject the claim that PACE loans are risky, arguing that they have used the same type of municipal bond-backed loans for decades to finance other types of projects. There are also rigorous eligibility requirements for those requesting PACE loans.
A Mercury News editorial explains:
Applicants must meet rigorous eligibility requirements. They must have equity in their properties and no history of property-tax or mortgage delinquency. The loans can be for no more than 10 percent of assessed value and can only be made when the improvements would show a positive return - for instance, by lowering energy bills to less than the annual cost of the assessment.
Attorney General Brown, who is running as the Democratic candidate for governor in California this fall, is getting some backup from a couple of prominent lawmakers on Capitol Hill. Reps. Henry Waxman (D-CA) and Barney Frank (D-MA), chairmen of the Energy & Commerce and Financial Services committees, respectively, have sent a letter to the secretaries of Energy and Treasury and the Director of FHFA urging cooperation in establishing guidelines that will allow PACE programs to continue while protecting taxpayers and private lenders.
The letter highlighted the importance of PACE:
PACE programs help overcome several obstacles that inhibit investments in energy efficiency. First, property owners are often unable to afford the up-front capital costs of even cost-effective energy efficiency improvements. They may also be reluctant to undertake efficiency investments if they do not anticipate owning the property throughout the entire payback period. PACE programs directly ameliorate those barriers. Additionally, municipalities see PACE programs as a way to promote efficiency beyond publicly-owned facilities and help address the energy consumption of individual residents. This also helps reduce transaction costs by promoting systematic efficiency improvements over individually-arranged retrofits. Both Congress and the Administration have endorsed the use of these vehicles for retrofitting homes for greater energy efficiency.