Lights out for household energy finance


Guest post by chinadialogue USA intern, Hara (Zhixin) Wang.

Property-Assessed Clean Energy (PACE), a US municipal government-level effort to help finance household energy efficiency, conservation, and renewables improvements, was dealt a blow earlier this month, when federal mortgage regulators claimed that the programme poses risks to mortgage lenders and insurers. The question of what constitutes the right policy framework for household energy independence was raised again.

PACE financing covers the up-front costs of energy updates for residential and small business properties through government-issued bonds. Property owners then pay back the cost in small increments through a special lien – a form of security interest – on their semi-annual property tax bill. If the property changes hands, the lien and the benefits of the upgrades are also transferred to the new owner, “allowing you to put solar panels on your roof, even if you aren’t planning on living there for the next 20 years,” explains Jerry Sanders, mayor of San Diego.  PACE financing decreases total energy consumption without incurring significant expenses to individual consumers.

However, the PACE program was vetoed by Fannie Mae and Freddie Mac, the two largest governmental mortgage lenders, who sent out a letter early May saying that they would not accept mortgages on PACE participatory properties because PACE funding could make existing loans riskier in an already badly shaken housing market. Their reasoning is that local governments that issue PACE loans are less qualified to judge a homeowners ability to repay and could issue loans that would push mortgages “over the edge”, into foreclosure. Furthermore, the policy as it is written allows PACE loans to be repaid before mortgages in the event of foreclosure.

Many PACE programs, including the nation’s largest one in San Francisco, GreenFinanceSF, and the nation’s first one in Berkeley, Berkeley FIRST, were suspended. On July 14, California’s Attorney General, and Democratic gubernatorial candidate, Jerry Brown, filed a lawsuit against Fannie Mae and Freddie Mac for killing the programme. 

Ethan Elkind, joint fellow at UCLA and UC Berkeley School of Law, pointed out that “If the DOE [Department of Energy] guidelines already in place protect lenders and mortgage insurers…there is evidence that these PACE-financed improvements to the homes increase their marketability, so there may be no loss at all on the property.” PACE is the only programme that directly finances clean-energy retrofits to property owners.

There are other models for financing energy retrofits that are still in operation, including the Energy Efficiency and Conservation Block Grant Program, managed by the DOE, which allocate federal funds to local government for energy efficiency and conservation projects, but not to individual homeowners.