A federal appeals court ruling struck a blow to a financing program for energy efficiency and water conservation projects on homes when it upheld a decision last week by the FHFA prohibiting participation by Fannie Mae and Freddie Mac.
Property Assessed Clean Energy (PACE) allows residential and commercial property owners to use municipal bonds to finance energy efficiency and water conservation projects. The costs are financed by bonds and repaid typically over a 15- to 20-year period by property owners in property tax assessments.
Sonoma and Riverside counties are continuing programs aimed at homeowners even though the lack of participation by Fannie and Freddie means homeowners would have to pay off the improvement expenses before selling their homes. Unaffected by the FHFA’s decision, commercial real estate PACE programs are taking off in California.
Originally conceived in Berkeley, Calif., in October 2008 as a way to help homeowners pay the upfront costs of installing energy efficient technologies, the PACE program stalled in July 2010 when the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, ordered the government-sponsored enterprises not to underwrite mortgages for homes with PACE loans. FHFA was concerned because the PACE liens are senior to the mortgage, so the PACE lender would be paid ahead of the bank, or Fannie or Freddie, in the case of foreclosure.
PACE liens are added to the property owner’s tax bill and stay with the property if it is sold.
Up to 28 states had adopted PACE programs before the FHFA came out with its decision in July 2010 effectively halting the program – at least on the residential side.
California, Sonoma County, other local governments and the Sierra Club sued the FHFA. FHFA lost a California court ruling in 2011 that required the federal housing agency to hold public hearings last summer to reconsider its stance and adopt rules justifying its action.
The agency had just postponed a decision on enacting a rule until September when the appeals court overturned U.S. District Judge Claudia Wilken’s decision last Tuesday.
In its ruling, the Ninth U.S. Circuit Court of Appeals in San Francisco said the housing agency does not have to adopt new rules in its role overseeing Fannie Mae and Freddie Mac. Determining which mortgages are too risky to buy is an appropriate action for the federal agency to take to preserve the GSAs, the appeals court said in its ruling.
Neither Sonoma County, nor Riverside County, plan to halt their programs as a result of the ruling.
Jim Leddy, Sonoma County’s community and government affairs manager, said they are going to continue to work with the Obama administration, because several departments have endorsed the program.
The county is also working with U.S. Rep. Mike Thompson, D-St. Helena, who plans to introduce legislation that, if passed, could impact the FHFA’s decision.
Sonoma’s program was in place before what Leddy calls the “dust-up with FHFA” occurred. Despite Sonoma County’s success with the program, Leddy said it has slowed since the issues with the FHFA arose in 2011.
Sonoma County has financed roughly $50 million in improvements to 1,783 homes and $10.17 million for 58 businesses with no defaults, Leddy said.
Since launching its program in February 2012, the Western Riverside Council of Governments has secured financing for 1,800 projects totaling $33 million and approved 4,700 applications totalling $136 million, said Barbara Spoonhour, director of Energy and Environmental programs for the regional planning agency.
Those totals are just for the residential program being underwritten by Renovate America, because the commercial real estate program was just launched, Spoonhour said. Digital Risk is acting as the underwriter for the commercial program.
Currently, the program is issuing limited improvement bonds as private placement bonds.
The agency is still evaluating the impact of the ruling, she said.
Since WRCOG launched its program after the FHHA issued its prohibition, it has structured the program so that homeowners are informed they may have to pay off the debt upon sale or refinancing of the property.
So far, they haven’t encountered problems when houses have traded hands. They have had 34 properties go through a title transfer and four prepayments. Two of the prepayments were requested by the lender and the other two were voluntary.
In fact, the WRCOG program has been so successful that they started a program called California Hero that will be a statewide residential and commercial program.
“We feel we have a turnkey product that cities and counties can utilize,” Spoonhour said. “It saves them from investing the upfront costs of creating a program – and from having to push the concept out two years while they establish a program.”.
WRCOG pushed ahead because of the economic benefits of putting the areas 650 registered homebuilding contractors back to work, she said.
Given the problems created by the FHFA’s stance, Figtree Energy Corp. is focusing on providing funding for commercial real estate upgrades for now.
Figtree arranges financing and lender consent for property owners by aggregating and selling the projects as municipal bonds and will consider projects as small as $5,000.
“Because Figtree is currently focused on commercial PACE solutions — all for which we obtain mortgage lender consent — the residential ruling only hinders us in that it confuses the PACE marketplace,” said Terri Steele, Figtree’s vice president of marketing.
Commercial PACE is moving forward, because “nobody guarantees commercial mortgages,” said Derek Brown, managing director at Clean Fund, which provides financing for the programs. “There is no regulator that has its fingers in the pies.”
He added that the federal Office of the Comptroller, which regulates national banks, worked to set up stringent parameters for the program so that commercial mortgages aren’t impacted.
The result is while residential PACE has been limited, commercial PACE programs could be bundling the privately placed bonds to sell in the public market within a few years, according to market watchers.
Brown said within 18 months his company expects to be doing between $40 million and $100 million.