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REVIEW SUMMARY
What. Property Assessed Clean Energy programs.
Issue. First lien priority of assessments a problem for mortgage holders.
Impact. Property tax lien improves economics of energy retrofits.
Homebuilders, manufacturers and environmental groups, holding hands as if in a drum circle, are beating up a federal agency in a financing fight with thousands of jobs at stake.
That's because after Florida and 21 other states adopted laws encouraging local energy retrofit loan programs to stimulate job growth and save energy, the Federal Housing Finance Agency issued a pointed statement last month that a key financing mechanism for “Property Assessed Clean Energy” (PACE) programs is a bad idea.
Loans for the program are put ahead of mortgage holders, including banks but mostly Fannie Mae and Freddie Mac. FHFA notes that none of those can afford more risk, particularly as the Fannie Mae and Freddie Mac are now fully backed by taxpayers.
But the FHFA's statement is upsetting states, which passed laws in the last 18 months. Florida's went into effect May 27 with near unanimous support by the Legislature.
Now it may have to amend the law to meet federal guidelines. “If we have to change our state law to make it fit we need to figure out a way to do it,” says Sen. Mike Bennett, R-Bradenton, a strong supporter of the bill.
But the stalemate confounds tradesmen and energy efficiency manufacturers looking for work, as well as environmentalists and lawmakers wanting to reduce the nation's greenhouse gas emissions.
Yet, according to an FHFA spokesperson, “PACE introduces uncertainty into the marketplace by putting the energy loan in front of the primary mortgage, thus transferring risk to the owner of the pre-existing mortgage.”
FHFA oversees Fannie Mae and Freddie Mac, the beleaguered government-sponsored enterprises that purchase 80% of home mortgages from banks and other lenders. The agency also regulates the 12 Federal Home Loan Banks, and together these government-backed organizations provide more than $5.9 trillion in funding for U.S. mortgage markets and financial institutions.
PACE supporters, however, counter that it's no different than lien priority given to any of the country's other 37,000 special assessment districts for other things like sewers, sidewalks or business improvement districts. They say the federal regulators are singling out PACE programs.
And that's spawned lawsuits against the FHFA, including one by California Attorney General Jerry Brown, who is running for governor. It has also spurred Congress to action led by U.S. Sen. Barbara Boxer, D-Calif., where nearly half of the 58 counties have PACE programs or plan to start one. The uncertainty is jeopardizing $110 million in federal investments for California, Boxer says.
A group called the PACE NOW Coalition is lobbying Congress to rein in the federal financial regulators.
But more risk is the last thing mortgage holders need. The American Bankers Association points out that the PACE loans are for improvements to individual homes — whereas utility districts are for a community need — and will probably be larger.
Still, that's not stopping Congress from quickly filing identical bills in the House and Senate to quash FHFA's statements.
Disrupting first liens
Florida's law allows local governments to issue PACE bonds backed by voluntary property tax assessments on residences and businesses making energy efficiency improvements to buildings.
But local governments want first lien priority rights in the event of a foreclosure, and bondholders need the certainty that the assessments will be there to pay off the bonds.
FHFA appears to be sticking its neck out on this one given that the White House has spent $150 million supporting PACE, with the Department of Energy handing out grants to states to get the programs up and running faster. Florida has applied for one of those grants to help five pilot PACE communities, including Sarasota County, to get their programs going.
Pinellas, Charlotte, Lee and Collier counties along with their cities are looking at implementing PACE programs too. Collier County has a Web site — pacecollier.com — devoted to it, and has a citizen volunteer, Steve Hart, pushing PACE forward with the strong backing of the county commission.
According to Theresa Connor, Sarasota County's director of environmental services, the county has put its PACE programs on hold until Congress, and perhaps the Legislature and the bond market, can sort all this out.
In an apparent effort to protect Fannie and Freddie, or any mortgage holder, from further financial disaster, the FHFA argues that PACE programs don't offer sufficient protection to mortgage holders.
The purpose of a May 5 “Industry Letter” from Freddie Mac to its sellers and servicers was to remind those clients “that an energy-related lien may not be senior to any Mortgage delivered to Freddie Mac.”
FHFA also has its share of powerful allies that agree. Those include the Office of the Comptroller of the Currency (administrator of national banks) the Federal Deposit Insurance Corp., and the American Bankers Association.
In a July 22 letter to Edward DeMarco, FHFA's acting director, the American Bankers Association's Executive Vice President Robert Davis, writes: “Disrupting the traditional first lien position of home mortgages, especially in a period of great instability in much of the mortgage market, is unwise, especially when alternative approaches are available to encourage lending for energy efficiency improvements.”
And this from a July 6 bulletin issued by the Office of the Comptroller of the Currency to CEO's of all national banks: “This lien infringement raises significant safety and soundness concerns that mortgage lenders and investors must consider.”
Davis also takes issue with the federal legislation: The bill “ ... does not ameliorate the serious concerns we have about establishment of super liens that will discourage lenders and investors, raise rates to borrowers, and generate mortgage liens apparently outside the consumer protection framework just enacted under the Dodd-Frank Act.”
Alternatives to assessments
If it happens, it may take some time and possibly litigation to resolve the lien priority issue. With 22 states and D.C. in various stages of advancing their programs, much coordinated negotiation is going to have to happen, especially if bonding assessment payments is the key to PACE's success.
One idea on the table is to test each side's assumptions by creating a pilot program involving 300,000 homes. But FHFA wants a more limited 10,000-home trial that PACE supporters argue is too small a sample size.
The new federal law proposed would require lenders to adopt new underwriting standards that support PACE financing programs and treat assessments the same as other property tax assessments.
But those underwriting standards that Fannie Mae and Freddie Mac follow must be consistent with the Department of Energy's Guidelines for Pilot PACE Financing Programs.
And it's uncertain if there would be sufficient bond buyer interest under the proposed federal law.
In reviewing the issue last September, Barclays Capital concluded, “ ... that any government action taken that would result in PACE liens being ... subordinated to first mortgage debt will result in a bond market that will not materialize...”
Florida's new PACE law doesn't follow those standards, at least in one key respect: the federal guidelines call for an assessment on a property not to exceed 10% of assessed value while the Florida's law allows costs up to 20% of just, or market, value.
The Florida law's sponsor, Rep. Steve Precourt, R-Orlando, says he's aware of the controversy and was planning to broaden the state's law next spring. Now, he says the Legislature may pursue it in a special session, but only if it's straightforward enough and consistent with the federal law and guidelines.
Maine, which adopted its program in February, doesn't rely on assessments. Instead, the state will finance it through a revolving loan fund and bond program, with the goal of creating a long-term, revenue-generating, and independent program.
And St. Lucie County, one of the five Florida pilot communities, proposes to set up a non-profit financial institution to create a revolving low-interest loan fund to be certified by a Community Development Financial Institutions (CDFI) program run by the U.S. Treasury Department.
St. Lucie leaders say CDFI's are a successful model that can be used for energy conservation and renewable energy projects. The county has secured support from four banks that have pledged $20 million toward the CDFI and are approaching foundations for support as well.
And while Sarasota County has put its PACE program on hold, it kicked off its “Get Energy Smart Retrofit” program Aug. 6 along with the cities of Sarasota, North Port and Venice.
Similar to PACE, the program is designed to cut the up-front cost of energy saving improvements with rebates and low-interest loans to homeowners. The $2.1 million program is funded by a Department of Energy grant paid for with stimulus dollars. That money might be better spent guaranteeing assessment payments.
A Property Assessed Clean Energy (PACE) bond is a bond where the proceeds are provided to commercial and residential property owners to finance energy retrofits (efficiency measures and small renewable energy systems) and who then repay the financing over 20 years by an annual assessment on their property tax bill.
PACE bonds can be issued by municipal financing districts or finance companies and the proceeds can be typically used to retrofit both commercial and residential properties.
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