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We have been writing about the financing method known as PACE - for Property-Assessed Clean Energy- for many months. (You can find all of our posts here.) Made available statewide through AB 811, PACE financing allows for solar projects (and other energy efficiency measures) to be funded by an assessment on the property that is paid as part of the property tax bill over twenty years. The funding comes by way of the sale of municipal bonds and there is no burden on local government budgets to support the program. This allows homeowners to make their homes more efficient (thereby lowering their utility bills) with little or no up-front cash and at the same time helps to create good-paying jobs in the local community. The County of Los Angeles approved its own PACE program (LACEP) in May and the first loans were set to be funded sometime this Fall. PACE financing was viewed as such a win-win it is no wonder that communities all across the country were scrambling to join in.
Not so fast. Mortgage companies, led by Fannie Mae and Freddie Mac, have cried foul. Since the programs operate as a property assessment, they have priority over the existing mortgage in the event of a default and subsequent foreclosure. Using such a program could put a homeowner at odds with the terms of their existing mortgage and might, all by itself, result in a technical breach of the mortgage contract. Faced with such resistance, PACE programs have come to a grinding halt. A story in the August 19, 2010 LA Times reflects the chorus of bad news that has been trickling out now for many weeks. Does this mean that PACE financing is dead?
Perhaps - but is the position of the mortgage industry reasonable? After all, the LA County program had some pretty stiff requirements for participation that were designed precisely to prevent foreclosures. In particular, the LACEP required that the debt to value ratio for the home could not exceed 80% and that the loan to value ratio could not exceed 10%. Assuming that those valuations were for recent market conditions, they are very conservative requirements. In addition, the homeowner needed to be current on both the mortgage and prior property taxes. Since the LACEP would have allowed the homeowner to substantially reduce their energy bills with either zero or little up-front cost, it is hard to see how participating could have pushed the homeowner closer to default, but if default had occurred, the mortgage holder would have still been protected. Indeed, by putting more money into the homeowner’s hands, it would seem that the risk of default would have been substantially lessened.
While legislative fixes are potentially in the works, in the meantime many projects are now on hold and with them, the jobs that are so badly needed during this difficult economy. Here’s hoping that the Obama administration can talk some sense into the mortgage industry and get these programs back on track.