Problems With PACE

Energy efficiency itself is a no-brainer. Invest in efficiencies, reap the savings. Simple! Win and win. But energy-efficiency financing isn’t so clear cut, especially when you listen to those of us advocating for more money and dreaming up ways to make it easy to borrow. I admit, we can get into technicalese real fast. But here’s the bottom line: to make the win-win scenario materialize, a family that owns or rents a home needs affordable and easy-to-access loans to make energy-saving, cost-cutting improvements. With enough money back in their pockets from savings, they can make the loan payments. The projects pay for themselves. And after the loan is paid the family keeps all the savings from the retrofit—riding off into the sunset with cheaper bills and a good feeling about their climate footprint. With good programs in place, there’s big potential to cut demand for dirty fuels, neighborhood by neighborhood and city by city.

I have been an advocate of Property Assessed Clean Energy (PACE) financing because it allows a homeowner to borrow money and pay it back easily on the household energy bill. PACE allows local governments to borrow money by issuing bonds. That money, in turn, is loaned out to homeowners for retrofits, or used to back private loans. PACE financing gives homeowners some peace of mind about taking out a retrofit loan, because they know that if they happen to sell the house, the next owner will assume the payment. That’s because the loan is attached to the property itself, not the owner.

But there are some serious problems emerging with PACE financing. And the problems are big enough that San Francisco has scrapped their ambitious program.

The problem, according to the Federal Housing Finance Agency (FHFA), is that the local loans attach to the properties as liens if they are not paid off and those liens, because they are property taxes, trump banks for who gets paid back first from proceeds of a foreclosed home. In a housing market that is—at best—recovering, the risk of home loan defaults remains high and lenders do not want to risk losing more money.

It’s as simple as a schoolyard loan between two kids. If Bobby loans Billy 50 cents for candy but then Billy borrows from someone else later, Bobby still wants his money back first. Bobby is the bank. Banks don’t want to be put in a position of making mortgage loans only to be put in the back seat when it comes to collecting money if there is a default.

I spoke on behalf of legislation last year in Olympia in favor of allowing first lien position for banks loaning money to families who want to make retrofits. I still think that’s a good idea.

But it appears to be impractical and, according to the FHFA, not advisable for lenders. This change of mind from the FHFA puts the whole program in doubt in California. There might be a work-around, but almost any fix to the problem will add more paperwork (there goes the easy part) and a secondary position which drives up interest rates (there goes the affordable part). This is complicated in Washington State by the fact that local governments can’t use their bonding authority on behalf of private interests, meaning that bond financing (which is more affordable) is difficult to use for PACE programs.

Is all lost? Nope. After talking with a colleague in Oregon on one of my recent visits, I became convinced that although PACE is a brilliant idea, it isn’t the only or even the best way to build an easy and affordable loan program for home owners. There are other models. Look at Portland’s Clean Energy Works, for example. The way Portland has done this is to create a loan loss reserve account using stimulus dollars. A loan loss reserve account is a pool of money that guarantees the loan will get paid. That way, when a bank makes a loan to a homeowner from retrofits, it knows that it is going to get paid back, which lowers the risk and, more importantly, the interest rate. Low interest rates are critical, because without them savings get consumed by the pay back. Obviously, the big incentive disappears when the pay back is too steep.

The downside is that such loans aren’t assessed to the property, so if there is a sale, then the loan has to somehow be rolled into the financing of the seller and the buyer. That said, these kinds of transactions happen all the time. So, it’s doable. Which means that the solution in Washington and Oregon, for the time being, should be reserve accounts to keep loans looking good to banks and to keep rates down.

Seattle just received $20 million from the federal government. Using it in partnership with a progressive bank, like ShoreBank, to create loan loss reserve funds can get things cooking—and without the painful process of trying to get a constitutional amendment (which is an obvious solution for the bonding problem).

All this is to say that working through the financing pitfalls isn’t impossible and the work pays off—we get back to the place we started where energy efficiency projects that pay for themselves are no-brainers.

Photo courtesy of kevinrosseel from morguefile.com.