Renovating old buildings to be more energy efficient or incorporate renewable energy is a win-win—more efficient homes and businesses, some of them generating electric power themselves, cause less strain on utilities and power generators while also saving money for consumers on their monthly bills—but the renovations often come with an upfront price tag that could take years or decades to pay back. Property Assessed Clean Energy (PACE) programs allow property owners to borrow money for advanced energy upgrades, then repay the money over time on their property tax bill. What’s not to like? Well, that gets complicated. Until recently, homeowners in much of the country have been unable to benefit from PACE, and now that they can, new challenges have arisen from critics who say consumers do not get adequate protection from fraud. California, where residential PACE is most firmly established, is in the crosshairs – but also on the verge of improvements that would make PACE stronger, and more protective of consumer interests, than ever.  

PACE is in part a California story, and in part not. The program, which allows property owners to make energy investments and pay them off on their property tax bill, was signed into California law by then-Gov. Arnold Schwarzenegger in 2008 Since then, PACE programs have been put in place for owners of commercial properties in 16 states, and are in development in several more. But until recently, the entire PACE financing structure has been in limbo for homeowners, for the most part, though it has been going strong in California. 

In July 2010, the Federal Housing Finance Agency advised federal mortgage backers Fannie Mae and Freddie Mac not to buy mortgages with PACE assessments, since liens on the properties stood in the way of mortgage holders in the event of foreclosure. That put residential PACE on ice in most of the country, but not California, which set up a Loan Loss Reserve Fund to backstop residential PACE. In 2014, 17 counties joined to create CaliforniaFirst, a program for homeowners that allowed for loans for efficient renovations for up to $75,000 and a variety of repayment times. Now, there are 12 active PACE programs for homes and businesses across the state. 

In the years since, PACE has given Californians access to credit for replacing failing energy systems and making improvements to their homes, filling a critical gap in the consumer-financing marketplace. The program also serves California’s aggressive greenhouse-gas reduction goals by promoting greater adoption of energy efficient and renewable energy technologies. According to AEE member Renovate America, PACE-financed home improvements are on track to reduce California’s carbon dioxide emissions by millions of tons, cut homeowners’ utility bills by billions of dollars, and conserve over 10 billion gallons of water. 

Boosting the energy efficiency renovation market also means jobs: Renovate America estimates that PACE financing has created more than 25,000 jobs and put $5 billion into local economies across the state.

Since then, the federal strictures against residential PACE have eased. A year ago, the Federal Housing Administration and the Department of Veterans Affairs issued guidance allowing PACE assessments to coexist with mortgages they insure. The guidance, which opened the door for most PACE assessments to transfer with properties that have FHA and VA mortgages, created new momentum for residential PACE.

But just as residential PACE has started to take off, it has come under attack, with much of the focus on California, where it is most established. 

In January, the Wall Street Journal published an article calling PACE “the fastest growing loan category” but one with “eerie echoes of the subprime mortgage crisis.” (WSJ took another shot at PACE just yesterday, using incomplete data to conjure up a dubious trend of rising delinquency rates for PACE assessments.) Then, in June, the Los Angeles Times charged that some homeowners entered into PACE agreements without understanding their payback obligations – even though every homeowner in the Times piece signed financing documents that spelled out how the PACE assessments would be paid back.

In a blog post entitled “What the Wall Street Journal Got Wrong,” the American Council for an Energy-Efficient Economy (ACEEE) called the PACE criticisms “a tempest in a teapot.”

“To date, not a single home has been put into foreclosure because of unpaid PACE assessments,” wrote ACEEE chief economist Jim Barrett. “And less than 1% of homes with PACE assessments have gone into foreclosure for any other reason, a lower rate than the market average… As a financial vehicle, PACE is performing remarkably well. The great majority of PACE homeowners are making payments on time.” The investment research firm Morningstar also concluded in a report earlier this year that PACE assessments do not materially increase risk to underlying mortgages.

In addition, PACE providers have worked to improve consumer protections. Last year, providers came together with other stakeholder groups including Realtors to pass new California legislation – AB 2693 – requiring written disclosures for PACE financing modeled on the federal Know-Before-You-Owe form. And for over a year, Renovate America says it has been conducting live, recorded phone calls with 100% of its customers to ensure they understand the terms of their financing before they proceed with finalizing their contracts.

Still, sharks are in the water, circling residential PACE. National real estate and banking groups backed federal anti-PACE legislation introduced earlier this year. Under the guise of protecting consumers, the legislation would effectively kill residential PACE by subjecting it to federal mortgage laws – despite the fact that it is not a mortgage, and that the average new mortgage is 10 times the size of the average PACE assessment. The bill has drawn opposition from a broad coalition of groups including the National Association of Counties, the National League of Cities, Natural Resources Defense Council, Rocky Mountain Institute, ACEEE, and the Council of Development Finance Agencies.

In California, some local officials have taken action to deprive their citizens of the PACE financing option for energy improvements in their homes. In Kern County, the Board of Supervisors recently suspended PACE in unincorporated portions of the county. This action came in part as a result of Kern County real estate agents complaining that PACE assessments complicate the process of selling a home. In reality, as the PACE model has developed over the years, challenges related to real estate transactions have been addressed to the point where an outstanding PACE balance causes no more hassle than a home equity line of credit or similar home improvement loan.

It is also noteworthy that the loan-loss fund set up by California in 2010 has never been tapped.

That’s not to say that PACE can’t be strengthened. Now pending in the California legislature is SB 242, authored by Sen. Nancy Skinner, which AEE supported in a letter to lawmakers in June. Consumer advocates and PACE supporters are continuing to make SB 242 even more protective, proposing a number of commonsense measures to be considered as amendments. These include: 

(1) a recorded, live, confirmation of terms call between the PACE provider and property owners, which builds on the written disclosures modeled after the federal Know-Before-You-Owe mortgage disclosure already required by California law;

(2) an extended “right to cancel” the PACE assessment contract for the property owners that is linked to the property owner’s separate property improvement contract;

(3) enhanced underwriting criteria and mandatory automated valuation model (AVM) requirements for assessing property values for PACE;

(4) stronger eligibility criteria and management for which products are eligible; and

(5) new reporting requirements between the PACE provider and local governments.

In addition, three other key provisions are also under consideration for the bill: income-based underwriting, hardship relief, and further proposals around contractor and PACE administrator requirements and liability.

AEE supports all these improvements on the bill, which will only make PACE a more effective way for homeowners to make energy improvements in their homes and pay back the cost over time. If the Assembly takes up SB 242 when the legislature comes back into session next week, makes these changes, and sends the bill to Gov. Brown to be signed into law, we are confident that residential PACE will continue to grow, in California and across the country.

Residential and commercial PACE policy is always evolving across the country through both legislative and regulatory action. The problem is there are 50 state public utility commissions (PUCs) and 50 state legislatures, making it nearly impossible to identify and manage energy policy. Join our free webinar on September 20 for a live demonstration of how easy it is to stay on top of PACE policy across the country with PowerSuite.