Cities and counties throughout the U.S. are developing new finance programs that support green retrofits in their communities. Called PACE, these programs represent one of the most promising tools available to local governments eager to bring new jobs, energy bill savings, and environmental benefits to their residents.
Last month, a rather cryptic letter issued by Fannie Mae and Freddie Mac suggested that property owners with mortgages from these lending giants would be prohibited from participating in PACE programs. The move attacks the constitutional right of local governments to assess property taxes and throws a massive wrench in American green job growth and investment. Now a broad coalition of industry, environment, and government groups is working hard to meet this challenge head on and get PACE back on track.
Our members and others have been asking us about the implications of Fannie and Freddie’s actions – and what can be done to help keep PACE moving. To help explain the situation, we penned an article that we’ve reposted here.
Article published in Greentech Media on June 8, 2010:
Local governments have the constitutional authority to assess property taxes and use those taxes to pay for projects that benefit the public good. For over a hundred years, cities and counties have been using a widely adopted mechanism of land-secured financing to make improvements to sewage systems, sidewalks, street lights and other projects that serve a public purpose.
PACE (Property Assessed Clean Energy) programs use that same authority to finance energy efficiency, solar, water conservation, and other green retrofits on private property. Under these innovative PACE programs, the taxes are only assessed on those properties that have voluntarily opted to participate. By allowing property owners to spread payments across this kind of long-term, line-item addition to their property tax bill, PACE helps Americans overcome the single greatest barrier to efficiency and renewable energy improvements: upfront costs.
By putting boots on roofs and hammers in hands, green retrofits create thousands of local jobs. Even modest estimates for national PACE implementation expect the creation of approximately 160,000 long-term, green jobs for our economy.
Recognizing its tremendous implications for jobs and the environment, PACE has seen strong support at all levels of government. In early 2009, Congress passed legislation to make sure federal tax law doesn’t stand in the way of PACE progress. The PACE model was a cornerstone of Vice President Biden’s ‘Recovery through Retrofit’ policy recommendations. The Department of Energy has allocated over $100 million in Recovery Act dollars to help get PACE programs up and running. The White House and the Department of Energy have developed guidelines for emerging programs that mitigate risk for both homeowners and mortgage lenders. To date, at least 22 states and the District of Columbia have authorized their local governments to roll out PACE programs. And hundreds of cities and counties are quickly making good on their new authority to build local green economies. Thousands more have the opportunity to implement similar programs.
Unfortunately, on May 5th, Fannie Mae and Freddie Mac put this positive momentum at risk. The government-chartered entities, which collectively back around half of the mortgages in the US, issued “lender guidance letters” that seemed to suggest that PACE programs were incompatible with their mortgages.
The response was fast and furious. Letters of PACE support poured into the Federal Housing Finance Agency (FHFA), which oversees the two quasi-public lending entities. Governors including Schwarzenegger and Richardson, state attorneys general, mayors, officials from the Department of Energy, and representatives from across the PACE community all urged the FHFA to work with Fannie and Freddie to rescind or revise the lender guidance letters. Central to this effort was a call for a meaningful conversation with PACE stakeholders about specific criteria the financial regulatory community believes is necessary to enable PACE financing programs to proceed.
That decision is working its way through the halls of the FHFA and other regulators. Senior officials at FHFA have indicated that clarifications are forthcoming and that they are engaged in a thorough review of underwriting standards. Given the high level of political and business leadership directly involved in the discussion, we are optimistic that the regulators will encourage new lender policies that better reflect PACE’s modest risks and significant returns.
In the meantime, the move from Fannie and Freddie has many asking why these financial institutions — themselves the subject of intense scrutiny for their role in the mortgage crisis and ongoing federal bailout requests — are standing in the way of real economic recovery?
Specifically, the lender guidance letters expressed concern about “new” debt negatively affecting the security of their mortgages – an assertion that we believe is misplaced. Federal guidance specifically stipulates that PACE-funded improvements need to be cash-flow positive within a small window of time. In other words, the property owner’s utility bill savings must generally outweigh their increase in property tax payments. The money that a homeowner would use to pay for PACE improvements is already being used to pay his or her utility bills each month. There is no new debt created. If homeowners can’t pay their utility bills, there is very little incentive to pay the mortgage on a powerless, waterless home. But reduce the cost of a property’s monthly energy bills through PACE and you’re putting money back in the pockets of the property owner, funds that actually reduce the risk of default on the mortgage.
The letters also call into question the century-old tool of local governments to finance projects through land-secured tax financing. In response, the top-notch legal team at Paul, Hastings, Janofsky & Walker LLP took a close look at land-based finance issues under both federal and California state law. Thoughtfully summarized in a white paper you’ll find here (PDF), they concluded that PACE falls squarely within local governments’ constitutional authority. If Fannie Mae and Freddie Mac are successful in stripping away these special financing districts for energy efficiency and renewable energy, it calls into question the other 37,000 special assessment districts allowing public improvements in communities across the country.
The stark truth is, PACE is part of a very limited set of policy options available to local governments for addressing the serious challenges of economic revitalization, energy security, and — let’s not forget — climate change. This model is one of the best tools we’ve seen yet for chipping away at the carbon-intensity of our nation’s built environment. As is true of any effort to address the formidable challenge of climate change, PACE can only be one piece of the solution. But as the months and years tick by without strong national or international carbon policy, it’s becoming ever clearer that PACE — a local tool for direct progress — deserves to move forward.