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Published on November 19th, 2014 | by John Farrell

California’s Reserve Fund Won’t Lift The FHFA Boot From PACE’s Neck

November 19th, 2014 by John Farrell

Originally published on ilsr.org.

Earlier this year, the state of California announced a $10 million loan-loss reserve to solve the Federal Housing Finance Agency’s severe restrictions on using property-tax based financing for energy efficiency and renewable energy on residential property.

It’s a great concept, but evidence from on of California’s best property assessed clean energy (PACE) programs suggests the reserve should be three times larger, at a minimum.

An Innovation in Energy Efficiency Financing

PACE was a concept pioneered by Cisco DeVries in 2009 in Berkeley, CA, meant to solve two problems of making homes more energy efficient:

1) The average American moves every 5 years, less than the loan term or life of a typical energy efficiency retrofit

2) Getting information about energy savings opportunities is a challenge, and information is very disjointed.

The solution? A city-sponsored energy efficiency effort that allowed homeowners to repay energy efficiency and renewable energy improvements fixed to their property via their property taxes. The city would be a one-stop shop, homeowners would have simplified financing via a bill they already pay, and the cost (and benefit) of any improvements would pass to future owners of the property.

The Feds Slam on the Brakes

PACE was taking off big-time in 2010 when the Federal Housing Finance Agency (FHFA) issued “lender letters” saying that the liens (loans) taken against the property when doing PACE-sponsored retrofits were a threat to mortgage lenders, and that they would not buy or refinance mortgages on properties with PACE improvements (because PACE loans were senior to – paid before – the mortgage).

Why FHFA Was Wrong

Evidence from the $40 million in PACE-financed residential energy projects suggested that default rates were far below that of traditional mortgages (less than 1 percent), and that owners of energy efficiency homes were one-third less likely to default than owners of traditional homes. After all, energy saving improvements provided revenue for homeowners to repay their loan.

Despite the evidence (and a lawsuit), FHFA’s revised rules, released in 2012, doubled down on their PACE hate.

A Few Programs Soldiered On

While many of the existing residential PACE programs closed up shop, a few worked around the FHFA roadblock by providing homeowners with a robust disclosure. Others tried making the lien junior to the mortgage (but also less attractive to investors). In Sonoma County, and the Western Riverside area of California, hundreds of homeowners (particularly those who had no mortgage) were able to move ahead with PACE financing.

However, while PACE for commercial property – unaffected by the lender letters – continued to grow apace, the federal ruling gutted the opportunity for PACE to add momentum to the residential energy savings market.

California’s Solution: Right Concept, Too Small

The $10 million loan loss reserve in California ostensibly solves the lender problem. The fund will hold lenders harmless in event of a default. But based on progress of the PACE program on Sonoma County, CA, California’s state loan loss fund needs to be at least three times as big.

In their September 2013 report, the Sonoma County Energy Independence Program reported an average residential project cost of $28,000. If we assume a default rate of 1% (higher than the actual) for PACE projects, then California’s $10 million reserve can cover $1 billion of residential PACE projects. It seems like a lot, but that’s only 35,700 average projects (based on Sonoma county), out of approximately 9.5 million housing units that are not multi-family, or 0.37% of all properties.

The Sonoma County program already served 1558 projects by the fall of last year, nearly 1% of the county’s single-structure housing units.

In other words, California’s reserve fund is likely to be used up in a hurry, especially given the opportunity to serve the pent-up demand created by the FHFA’s four-year lull.

It’s a great concept and a good start, but when Fannie and Freddie put their boot on your neck, you’ll need more than a modest loan reserve fund to get property-based financing for residential property back in the race.

Photo Credit: kennysarmy

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Tags: California, Energy, financing, municipal, PACE, property tax, US

About the Author

John Farrell directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development. Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World. John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.

sault

I’m not a real estate / property tax / finance guru, but this sounds like a bond that the city takes out to finance the installation of the PV system that is paid back (with interest) by the property owner over time, probably 20 years or so. Just like the bank will reposes your house if you default on a mortgage, how hard is it for the city to “reposes” the solar PV system and then use the electricity sales from the array to keep paying off the bond until somebody else buys the house? Might be a bit tricky to get all the legalise right, but lawyers are smart (sometimes). I guess banks would be a little leery having city property sitting on the roofs of their repossessed houses and selling the combined property would be a bit tricky, but people buy houses with city water mains, sewer pipes and telephone poles or whatever that belong to the power company all the time. There has to be a way to untangle the real property that banks are interested in and the solar PV systems that sit on top of them.
JamesWimberley

Obama has not done a good job on housing appointments, or indeed housing policy generally. First he kept on Bush appointee Ed deMarco far too long, then replaced him with Mel Watts who hasn’t got the energy transition message.
- Kyle Field
  
  Can’t fix everything though he sure does seem to be trying…climate change, health care, iraq, afghanistan, russia, immigration and on and on…
  - http://zacharyshahan.com/ Zachary Shahan
    
    Have to wonder what a day, week, month, year in the life of the POTUS is like.
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    The people who want things to stay the same vote.
    
    The people who want things to get better don’t bother.
  - sault
    
    Plus, he has one of the most determined opposition parties ever and the media has gone into overdrive parroting Faux “News” garbage like “Benghazi! Solyndra! Ebola!” over and over again. It doesn’t help that voters in 2014 thought unemployment was at 32%, that “Obamacare” was failing and that Obama wasn’t fighting ISIS nearly as hard as he could (although exactly zero strategies that would have worked better were offered by the Repubs). Combine this with the fact that the Dems shot themselves in the foot on immigration before the election as well as failing to make the GOP own up to their profoundly unpopular policies and you get a 35% turnout rate where only 18 – 20% of registered voters (out of a larger population of eligible voters) pulled the lever for Team R and gave them control of 2 /3 of government (since they already control the SCOTUS too) for the next 2 years.

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California’s Reserve Fund Won’t Lift The FHFA Boot From PACE’s Neck