Supporters of an innovative clean energy financing scheme welcomed a favorable court ruling earlier this month. On August 9, a federal district court judge in California ruled (PDF) that the Federal Housing Finance Agency (FHFA) violated federal law when it decided, without public notice or opportunity for stakeholders to comment, in July 2010, not to underwrite mortgages on homes with property assessed clean energy (PACE) loans.
As I wrote in January, FHFA was concerned that in most states with PACE programs the liens resulting from the PACE loans have priority over mortgages – the PACE lender would be paid ahead of the bank, or Fannie Mae or Freddie Mac, in the case of foreclosure.
PACE watcher Ethan Elkind, who holds a joint appointment at the UCLA and UC Berkeley law schools, called the ruling a “decisive win” for the plaintiffs, which includes the California Attorney General’s Office. “With this decision,” Elkind wrote at the Legal Planet blog, “the FHFA PACE policy is officially toast until the agency can develop a final rule pending the outcome of an ongoing rulemaking process.”
The public can submit comments (PDF) to inform that rulemaking process until September 13.
“This decision does not clear up the long-term uncertainty around PACE, but it limits the FHFA’s ability to issue a sweeping policy undercutting the program,” said Elkind. “The final rule (whatever form it takes) will be subject to APA [Administrative Procedure Act] requirements and likely judicial scrutiny.”
The district court ruling does not settle the matter. The FHFA can appeal, and a higher court might need to resolve contrary PACE decisions in New York courts, according to Elkind.
Under the circumstances, he says, “Local governments may be hesitant to restart their PACE programs until these questions are answered, and they’ve already missed a crucial window to use now-spent stimulus funds to launch them.”
PACE financing enables property owners to take out a loan, usually via city- or state-organized bonds, to pay for energy efficiency upgrades or onsite renewable energy. Loans are repaid, typically over 20 years, through an annual supplemental property tax assessment.
Cooperative solution with the FHFA?
In a recent interview, I spoke with Ygrene Energy Fund President Dan Schaefer about the August 9 court ruling and what comes next for residential PACE programs. Regular readers of this blog will remember the name. I interviewed Schaefer and Ygrene Chairman Dennis Hunter for an April post on the pending launch of Ygrene’s South Florida Green Corridor District PACE program. Ygrene assists local governments in establishing PACE districts for commercial and residential properties.
“We think that the win in the California [federal district] courts is a real positive step in terms of establishing this asset class and recognizing public benefit as it relates to energy reductions and the need for massive reduction in energy use in the United States,” says Schaefer.
He urged stakeholders concerned about PACE financing to submit comments before the September 13 deadline “in order to drive a more cooperative solution with FHFA.”
“The goal is that you end up with an underwriting standard we can then all adhere to. Unfortunately, the types of rules that have been presented [by the FHFA] are extreme, but I think that the odds of having some form of underwriting standards that are reasonable are high at this point,” he says.
Schaefer noted that there is still a chance the FHFA will undertake a full Environmental Impact Statement (EIS) on PACE financing. Though not ideal – “that could drag this on for quite some time. The initial goal right now is to get enough public comments and to have a reasonable underwriting standard that we can all live with,” Schaefer says – such a study would force the FHFA to identify the environmental benefits of PACE programs.
“IF FHFA has to go through a full [EIS], I think that will be incredibly powerful for PACE advocates because this will clearly demonstrate the value as it relates to the environment, which is one of the areas, from what at least we can see publicly, was totally ignored by the FHFA when they approached this issue,” says Schaefer.
The FHFA’s unwillingness to acknowledge the financial benefits of PACE loans leaves Schaefer perplexed. “Mathematically, this is a positive impact to a bank loan. That’s what’s kind of crazy about this,” he says. “This is a way for banks to protect their portfolios against rising energy costs, and, on the day the project completes, the loan’s value, on paper, will go down. It’s an economic positive to a lender.”
Residential PACE rolls on
In the wake of the July 2010 FHFA decision, most local governments shuttered their residential PACE programs. A few jurisdictions, however, either continued on, the Sonoma County Energy Independence Program foremost among them, or, in the case of the HERO Financing Program in Riverside County, California, launched new programs. In Sonoma County, says Schaefer, PACE participants have been able to re-finance mortgages, the appraised value of their homes has increased after PACE retrofits, and at the time of sale PACE loans have been paid off like any other loan. Meanwhile, the homeowner reaps the benefits of more energy-efficient equipment and lower operating costs.
“When people figure out that’s where this matters,” says Schaefer, “they say, ‘OK, it doesn’t seem as dangerous as the common thinking that if I do [a PACE loan] my bank’s going to call me and foreclose’ – which is just not true and not practical. If you’re a paying customer, and you’re current on your mortgage, the last thing in the world a bank’s going to do is foreclose on you.”
