FHFA, aka the evil empire
At the recent Net Impact Conference in a session on financial innovations and energy efficiency, Joel Freehling (Senior VP, Urban Partnership Bank—formerly Shorebank) made an argument that four financing related issues are blocking energy efficiency projects in the US:
- Energy efficiency projects are generally not being financed by commercial lending banks
- Low, fixed rate, long-term loans do not exist to the extent necessary. (Governments have loan programs, but these are small. For example, Pennsylvania is the largest state program at 20m in loan-able funds.)
- Bad data is a big problem, especially when it comes to the determining the levels both before installation and after installation.
- Utility commissions are generally too conservative. Plus, the old incentive problems for utilities are also there still.
To address most of these interrelated issues—all except bad data—PACE Loans were seen as the great solution to get residential efficiency projects financed. PACE provides the type of long-term, fixed rate debt that it complements the cash flows that energy conservation generates. So, what is PACE? Or, perhaps, more sadly, what was PACE?
Property assessed clean energy (PACE) programs enable local governments to finance renewable energy and energy efficiency projects on private property, including residential, commercial, and industrial properties. The model eliminates the chief barrier to clean energy installations: the large upfront cost. Renewable Funding, About PACE
It is critical to understand that PACE loans are attached to the property, not person who lives in the house or the company that occupies the building. Here is how it works:
States give the local authority permission to issue new bonds. Residents apply to get a loan using the money from the sale of the bonds. The money could be used to finance home efficiency projects or to install new clean energy generation. The new loan would be senior to the mortgage on the property in case of default. Repayment of the loans could be incorporated into the tax bill for the property.
Many states had passed their own version of PACE legislation to allow these funds to begin to flow. However, in July 2010, the Federal Housing Finance Agency (the agency that oversees Fannie Mae and Freddie Mac) issued a letter that said that PACE loans represent “systemic risk”—oh, the irony!—to the US mortgage markets. Therefore, FHFA will not guarantee these loans. Residential PACE markets are virtually frozen waiting for clarification or for Congress to act.
Freehling said that the FHFA action against PACE represents a potential misunderstanding because only a small fraction of the loans are senior to the mortgage—that amount which is due in the year that a default occurs. The rest of the principle and interest are assumed by the new owner of the property and continue to be repaid through the property tax bill. No word yet about whether Congress will act to save the movement. The results from Tuesday’s midterm elections would suggest that they won’t be in a hurry.
