The PACE Program vs. Mortgage Giants

Posted On: Monday, July 19, 2010 - 11:25am | Posted By: Greg Gamp
Topics: Community Information, Laws and Regulations | Tags: Fannie Mae, Freddie Mac, Mello-Roos, mortgage, PACE

The PACE program was a great idea that hit a wall when it came up against mortgage lending giants Fannie Mae and Freddie Mac. PACE stands for Property Assessed Clean Energy. It’s a new paradigm in financing models that support homeowners in greening their houses.

Here’s how PACE works:
 Property owners initiate energy projects (like installing solar panels or high-efficiency furnaces) and then pay for them through an addition to their tax bill. This way, the cost can be paid back over 15-20 years, instead of up front. If the owner sells the property before the project is paid off, the unpaid balance gets transferred to the new owner, who then benefits through the savings on their energy bills. PACE has been lauded for solving the two biggest challenges to encouraging owners to green their homes:
  • High upfront costs
  • Worrying about losing out on their investment if they move

A side bonus of this plan is that it creates more jobs in the green building industry and helps those businesses succeed and thrive… which only encourages more green building--a positive environmental trend.

Pretty much everyone has been happy with this arrangement. (Even the Obama administration has endorsed PACE with $100 million in stimulus-act funding.)

Except, apparently, our fearless mortgage giants, who have a bone to pick with the program: The problem they have is that tax liens inherently take priority over mortgages. This has raised a concern for Freddie Mac and Fannie Mae because they don’t want home improvements paid off before mortgages.  On May 5th, they sent a letter to lenders “discouraging” them from taking advantage of PACE lending programs. This has effectively brought PACE to a dead halt.

It’s easy to see where the mortgage companies’ priorities lie, and why. However, it’s a shame that they have the power to squelch an innovative and environmentally positive initiative.

To make things even more confusing, a very similar added tax, Mello-Roos Assessments, have been the norm for years without any a peep from the mortgage giants. Mello-Roos is a form of financing that can be used by cities, counties, and special districts (such as school districts). Mello-Roos Community Facilities Districts (referred to as CFDs) raise money through special taxes that must be approved by two thirds of the voters within that district. A CFD is formed to finance major improvements and services within the district, which might include schools, roads, libraries, police and fire protection services, or ambulance services. The taxes are secured by a continuing lien and are levied annually against property within the district.

Since Freddie Mac and Fannie Mae are already processing mortgages in areas using Mello-Roos assessments, it seems disingenuous for them to be putting their foot down about the PACE program.

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Gregory Gamp

As a longtime pilot, Greg knows how to analyze critical facts to chart a successful course.

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