Removing federal obstacles to property-assessed clean energy (PACE) has been a long-term subject of debate. United States Department of Housing and Urban Development (HUD) issued a guideline on July 19 enabling residential PACE financing and clarifying the conditions for purchasing or refinancing assessments with Federal Housing Administration (FHA) loans.
This announcement is an important step for addressing financing barriers for homeowners. Previously, federal organizations took a stand that restricted PACE’s growth.
“The guidance tells the market that two giants in American housing, HUD and FHA, agree that PACE is a valid use of state and local assessment finance and [the market] can proceed with FHA-related mortgage products in many ways,” said David Gabrielson, executive director of PACENation.
What was the difficulty?
Property tax-based assessment financing is not new. For decades, state and local governments have used assessments to finance many projects that boost property value and provide clear public benefits. These include water systems, sidewalks, street lights, and other projects.
Residential PACE programs address clean-energy market failures by allowing homeowners to benefit immediately from energy upgrades while paying back the costs through long-term property taxes.
“It is actually a new use of a very old public-sector financing technique that is designed for building owners to make their buildings more energy-efficient and [support] renewable-energy production,” Gabrielson said.
While PACE programs have appealed to homeowners throughout the nation, they received serious opposition from bankers and mortgage lenders including Ginnie Mae, Freddie Mac, and their federal regulator Federal Housing Finance Agency (FHFA). These institutions have refused to purchase or guarantee mortgages with PACE assessments attached.
This is mainly because PACE, as a property tax assessment, is not paid off when homeowners sell their properties. The assessments remain with the properties. In a situation of default, the property tax payment is paid first before the mortgage. Mortgage lenders have been concerned about lower profits occurring during these default scenarios due to the PACE assessments.
“Such opposition from mortgage lenders has been the fundamental tension that catches a lot of states and municipalities around the country. It is a tension that has make it difficult for states and local governments to go forward with residential PACE program – they just don’t know what FHFA might do about PACE,” said Gabrielson.
What does the guideline say?
The HUD guideline clarified that, during property transactions, PACE can remain associated with a property with a FHA-insured mortgage. The guideline allows PACE liens to be subordinated to other loans and stay with the properties.
According to the webinar, the mortgage letter also specified some requirements for PACE loans.
- PACE must be collected and authorized in the same way as other taxes and assessments under the state law.
- Only delinquent regularly scheduled PACE assessment payments take priority over the FHA-insured mortgages.
- The full amount of the outstanding PACE obligation cannot accelerate.
- The PACE obligation must transfer freely between property owners.
- The PACE obligation has to be disclosed fully to all parties during sales. This includes the initial property owners, the future buyers, and the underwriting institutions.
- The appraisal must include the analysis and gather further information about the impacts of the improvement on the value of the property.
“It is the first time any government agency has agreed to insure or guarantee properties with PACE loans,” wrote Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute.
Why is the guideline important?
The most important aspect of the guideline is that it acknowledges PACE to be a valid tool for homeowners and communities. It supports providing properties with PACE loans from HUD and FHA.
“It will make it easier for homeowners to sell their properties without paying off the PACE assessments,” said Gabrielson. “It will also make it more difficult for state banks to oppose PACE – and thus encourage more state governments to espouse residential PACE programs.”
The guideline can be seen as a first step and as a positive signal. The more PACE projects are deployed, the more data will be available to quantify PACE’s value.
“It doesn’t means that everything will change overnight, but it definitely is a good step in that direction,” said Cisco Devries, CEO of Renew Financial.
What are the remaining challenges and next steps?
For the states without residential PACE legislation, the most important next step is to pass the legislation to authorize it, considering existing laws first.
In states that already have legislation on PACE, there should be an agency that can sponsor PACE programs. For example, there are green banks in Connecticut and New York that can take this initiative. Companies that can train contractors to introduce PACE to customers will also be essential.
“The infrastructure [includes] state law, program implementation, and contractor and homeowner education. Nobody can use something that they don’t know anything about,” said Gabrielson. “The next steps should be continuing to evaluate the progress, showing the positive experiences, and beginning to convince mortgage lenders and real estate agents.”