The Energy Future Coalition works on a variety of issues, all of which face significant obstacles. The issue of Property Assessed Clean Energy (PACE), an innovative energy efficiency program, is no exception. The only difference with PACE is that one obstacle that exists, shouldn’t. And it is major. The obstacle in question is none other than the Federal Housing Finance Agency, which has blocked the onset of PACE, a program that most experts consider to be a no-brainer. The Energy Future Coalition has made it clear that it agrees with the consensus through is submittal of a comment to the Federal Housing Finance Agency (FHFA) in ardent support of PACE financing. The comments can be found here.
PACE is a straightforward and innovative financing program for clean energy improvements to homes and businesses. As with all energy efficiency financing mechanisms, it involves several stakeholders: building owners, banks, municipalities, and contractors. It starts with local governments, who pay the upfront costs of home retrofit improvements to contractors. The contractors go into residences and install energy efficiency measures such as new windows, insulation, and duct sealing. Then, the upfront costs initially paid by the local government are paid back by the building owner over time. This repayment comes in the form of property taxes, which are attached to the building’s mortgage as a special assessment. The kicker here is that most underwriting standards dictate that PACE projects must have an investment-to-savings ratio of over one. And what does that mean exactly? It’s simple, really: the reduced energy use due to the retrofit will allow the building owner to save more on their energy bill than they must repay through the additional property taxes.
It’s a win-win for all involved parties. Local governments create wealth in their cities while promoting environmental sustainability. Building owners save money on their energy bills, feel increased comfort in their homes and offices, and see their property values go up. Contractors create jobs by hiring new workers for an increasing number of projects. And as for the benefits to banks, some early numbers suggest that a lower number of PACE-assessed mortgages default, demonstrated by a 0.88% default rate across three PACE pilot programs in comparison to the national mortgage default rate of 5.49%. The idea that the building owner’s total bill is actually less per month supports these numbers. PACE leaves more wiggle room for homeowners to pay mortgages, not less.
So what is the FHFA doing to stop it, and why? The FHFA has blocked Fannie Mae and Freddie Mac from purchasing PACE-assessed mortgages, as well as prohibited them from allowing new PACE assessments on mortgages they already own. Not only does the FHFA believe that it will cause the default rate on these mortgages to go up, but a PACE assessment also takes a first lien position, meaning that in the case of a default municipalities would get paid back first before Fannie Mae or Freddie Mac. What the FHFA fails to see are the overwhelming benefits. The overall conclusion that the Energy Future Coalition’s comments build up to is that with the aid of strong underwriting standards, building owners should actually default less often, therefore benefitting the FHFA. And they are not alone in this position. 30,000 plus experts, agencies, and stakeholders have submitted comments in support of PACE, too.
More pilot programs and more data will help, but PACE programs will never scale up to the level they should until the FHFA backs off its stance. Hopefully, it won’t take long for them to see the light. America needs it.
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