After Conflicts With Mortgage Lenders, California Restarts Residential PACE: Greentech Media

Will residential PACE programs finally have a chance to scale?

California officials say the state’s stalled program for financing residential efficiency retrofits through property taxes is ready to scale once again.

After more than three years of conflict between large mortgage lenders and efficiency advocates, California is announcing that homeowners will soon be eligible for property-assessed clean energy (PACE) loans through the CaliforniaFIRST program. Previously, only commercial building owners and multi-family housing units could participate.

The addition of homeowners is a big breakthrough for residential PACE, which supports energy efficiency loans that get paid back through incremental increases to property taxes over the span of twenty years. The concept originated in Berkeley, California in 2008 and swept across the country before getting thwarted by federal housing regulators.

In 2010, the Federal Housing Finance Agency (FHFA) warned the country’s two biggest lenders, Fannie Mae and Freddie Mac, not to underwrite mortgages for PACE customers. FHFA argued that it added too much risk in the event of a default because the PACE loan took precedence over the mortgage.

Residential PACE programs quickly ground to a halt, with a few exceptions. In Miami, PACE program administrator Ygrene announced a $230 million bond issuance to support residential projects last September. Ygrene’s CEO Stacey Lawson said the problem wasn’t that federally backed housing lenders were banned from serving PACE customers — they simply required the mortgage to be paid first. As long as homeowners understand the risks involved, argued Lawson, then they can still legally participate in PACE.

But fears that FHFA would foreclose on PACE participants or deny financial services to communities supporting the program were enough to kill momentum — even if none of those fears have come to pass.

Last summer, California Governor Jerry Brown struck back with a lawsuit against FHFA, Fannie Mae and Freddie Mac in an attempt make them justify their position on PACE programs. A District Court initially ruled in favor of the State of California, but a Court of Appeals soon reversed the decision.

Months later, Governor Brown and the State Treasurer Bill Lockyer proposed a compromise: a $10 million loan-loss reserve that would be used to pay back housing lenders in case of default. That program is now being implemented, and it is the key reason why California has opened up its Residential PACE program.

“We are hopeful that this constructive engagement is a game-changer and will help bring PACE to scale,” said Cisco DeVries, chief executive of California’s PACE administrator, Renewable Funding, when the reserve was announced last fall.

Renewable Funding isn’t the only PACE administrator moving back into action. Last week, Duetsche Bank sold the first securities constructed from $103 million in residential PACE loans via Renovate America’s HERO program.

In the long term, efficiency advocates are hoping to integrate efficiency into federal mortgage underwriting standards. A recent empirical studyfrom the Institute for Market Transformation concluded that energy-efficient households are 32 percent less likely to default. Supporters of revised standards say lenders should consider energy use just like income and personal assets when evaluating a mortgage. National legislative efforts to support the change have so far fallen flat.

In the meantime, California may have found a short-term answer to the problem. This summer, more than 160 cities in seventeen counties will once again be offering residential PACE options, adding to the $200 million in commercial and residential projects supported by the program in the state since 2008.

Also adding to the round of PACE news this week, Figtree Financing closed a $60 million fund to support commercial PACE projects around the country — another sign that commercial programs are still going strong.