Road Blocks to Residential PACE Programs and an Opportunity for Their Rejuvenation
Recognizing the economically feasible and significant energy-efficiency gains that are achievable in the residential and commercial sectors,[1] twenty-seven states have passed legislation that enables local governments to establish property assessed clean energy (PACE) finance programs.[2] In communities that offer PACE programs, property owners can voluntarily choose to receive financing to complete energy-efficiency improvements on their property and will then pay back the cost of the improvements through a special assessment on their property taxes that runs with the property.[3] Importantly, these special assessments are set at a level so that they amount to less than the annual financial savings from PACE improvements yet are generally sufficient to pay off the PACE loan within five to twenty years.[4]
Despite the support for PACE programs by one arm of the Obama Administration, namely the U.S. Department of Energy,[5] the Federal Housing Finance Agency (FHFA) to date has been squarely opposed to residential PACE programs.[6] FHFA, along with Fannie Mae and Freddie Mac—which FHFA regulates and oversees—have taken actions since 2010 that have effectively halted the development and implementation of residential PACE programs.[7]
Their opposition has been a response to what they view as several common aspects of PACE programs. First, in most states, the liens on property associated with PACE loans are senior in priority to the secondary mortgages that would be held by Fannie Mae or Freddie Mac,[8] and the FHFA has stressed that the Uniform Securities Instruments (USIs) developed jointly by Fannie Mae and Freddie Mac prohibit such liens that are senior to its mortgages.[9] Second, FHFA points out that “[n]othing in PACE requires that local governments adopt and implement nationally uniform financial underwriting standards,” and in the opinion of FHFA, “[m]any PACE programs also do not employ standard personal creditworthiness requirements.”[10] These were among the primary “significant risks to certain assets and property of [Fanny Mae and Freddie Mac]” that supported a January 2011 FHFA directive that ordered those institutions to ‘‘continue to refrain from purchasing mortgage loans secured by properties with outstanding first-lien PACE obligations.’’[11]
Over the past two years, supporters of PACE programs have sued FHFA, Fannie Mae, and Freddie Mac in federal court, brining procedural and substantive challenges to the actions and positions described above[12]—and some have won on procedural claims.[13] One of these cases resulted in a court order to FHFA to use notice and comment rulemaking procedures that comply with the Administrative Procedure Act to create a rule that addresses the FHFA’s treatment of PACE programs in relation to mortgages held by Fannie Mae and Freddie Mac.[14] Public comments in response to FHFA’s resulting advanced notice of proposed rulemaking are due March 26, 2012.[15]
To seize the low-hanging fruit of residential energy-efficiency gains that PACE programs encourage, President Obama should unequivocally continue his support for these programs.[16] The likelihood that Congress will pass legislation protecting PACE programs any time soon is remote, due to frequent congressional gridlock.[17] Moreover, municipalities have demonstrated reluctance to adopt PACE legislation with a deferred lien priority.[18] For these reasons, President Obama should put political pressure on FHFA to interpret and more strictly regulate senior-lien PACE programs under FHFA’s expected rule in a manner that still allows municipalities to develop and implement these programs, as long as FHFA can do so without exceeding the scope of its authority. Even PACE supporters have acknowledged that it would be appropriate for federal regulation to impose more stringent, uniform underwriting criteria on PACE programs, increase consumer protections, and reduce PACE programs’ financial risk to mortgage holders.[19]
[1] Natural Res. Def. Council, Boosting Energy Efficiency Nationwide Through Measurement and Performance-Based Rewards 1, 3 (2009), available at http://www.nrdc.org/globalwarming/cap2.0/files/efficiencyperformance.pdf; Ben Block, Study Finds Rich U.S. Energy-Efficiency Potential, Worldwatch Institute, http://www.worldwatch.org/node/6212 (last updated Feb. 25, 2012).
[2] PACENow (Feb. 19, 2012), http://pacenow.org/blog/. For an overview of the substance, history, and current status of PACE programs, see The Inception of PACE Financing, Its Support, and Its Potential, Alliance to Save Energy, http://ase.org/resources/inception-pace-financing-its-support-and-its-potential (last visited Feb. 25, 2012).
[3] PACENow (Feb. 19, 2012), http://pacenow.org/blog/; Guidelines for Pilot PACE Financing Programs, U.S. Dep’t Energy 1 (2010), available at http://www1.eere.energy.gov/wip/pdfs/arra_guidelines_for_pilot_pace_programs.pdf.
[4] PACENow (Feb. 19, 2012), http://pacenow.org/blog/; The Inception of PACE Financing, Its Support, and Its Potential, supra note 2.
[5] See Status Update – Pilot PACE Financing Programs, U.S. Dep’t Energy, http://www1.eere.energy.gov/wip/pace.html (last updated Jan. 27, 2011).
[6] Mortgage Assets Affected by PACE Programs, 77 Fed. Reg. 3958, 3960–3961 (Jan. 26, 2012); California v. Fed. Hous. Fin. Admin., Nos. C 10-03084 CW, C 10-03270 CW, C 10-03317 CW, C 10-04482 CW, 2011 U.S. Dist. LEXIS 96235 at *9–11 (N.D. Cal. Aug. 26, 2011) (summarizing the actions of FHFA, Fannie Mae, and Freddie Mac taken in opposition to PACE programs in 2010 and 2011).
[7] PACENow (Feb. 19, 2012), http://pacenow.org/blog/; The Inception of PACE Financing, Its Support, and Its Potential, supra note 2.
[8] Mortgage Assets Affected by PACE Programs, 77 Fed. Reg. at 3959.
[9] Id.
[10] Id. at 3960.
[11] Id. at 3960–61.
[12] Id. at 3961.
[13] See Fed. Hous. Fin. Admin., 2011 U.S. Dist. LEXIS 96235 at *5, 53–54.
[14] See Mortgage Assets Affected by PACE Programs, 77 Fed. Reg. at 3960; Fed. Hous. Fin. Admin., 2011 U.S. Dist. LEXIS 96235 at *5, 53–55.
[15] Mortgage Assets Affected by PACE Programs, 77 Fed. Reg. at 3958.
[16] The Inception of PACE Financing, Its Support, and Its Potential, supra note 2.
[17] See, e.g., As Gridlock Consumes Congress, Boehner Says House “Has Done Its Job,” ABC News (Jan. 29, 2012, 9:04 a.m.), http://abcnews.go.com/blogs/politics/2012/01/as-gridlock-consumes-congress-boehner-says-house-has-done-its-job/ (noting the “bitterly divided political environment” in Washington, D.C.).
[18] The Inception of PACE Financing, Its Support, and Its Potential, supra note 2.