This is a guest post by former Colorado governor Bill Ritter, director of the Center for the New Energy Economy and an AEE Institute board member.

The White House announcement yesterday on residential Property Assessed Clean Energy (PACE) is a welcome solution to a problem that has plagued states since 2010. It will go far toward helping all citizens, but especially those on a low and moderate income, to make efficiency improvements to their homes and lower their energy bills.

 A little history. In 2008, Colorado and California passed the first PACE legislation – allowing households to finance energy improvements on their homes through a simple assessment on their property tax bill. The revenue collected was bonded to finance the energy improvements, creating a seamless and easy process for homeowners. Shortly thereafter, 30 states followed with PACE legislation of their own. Programs began exploding around the country.

In 2010, the Federal Housing and Finance Agency (FHFA) issued a letter saying that Fannie Mae and Freddie Mac could not guarantee mortgages on homes that included a PACE loan. While states had structured their PACE programs in different ways, some states had made the PACE assessment senior to the mortgage, similar to other property tax assessments. In a review by the Lawrence Berkeley National Lab in 2010, the authors concluded:

“Typically, the tax liens created by assessments are senior to other obligations, like mortgages, and must be paid first in the event of foreclosure. Fannie Mae, Freddie Mac, the FHFA and other financial regulators reasoned that PACE assessments were, in effect, loans not assessments and so violated standard mortgage provisions requiring priority over any other loan.”

This action by the FHFA effectively stopped this successful policy with one stroke of a pen.

Since then, the Obama administration has been working with financing experts, the FHFA and other stakeholders to try and solve this thorny problem. The new FHA guidance issued yesterday clarifies that the PACE assessment does not take first lien position ahead of a mortgage and that the assessment transfers with the property itself. It also requires home appraisers to factor in PACE-related improvements in the value of the property. This clarity is the linchpin that states and municipalities needed to begin, once again, to offer this valuable service to their residents.

While most households in the United States spend 4% of their annual income on energy, low-income households typically spend 17%. Furthermore, their level of income often flags them as a credit risk to lenders. Using PACE, under which the assessments issued to date have less than a 2% default rate, can help to raise the credit scores of low income citizens. Finally, the competitive rates at which PACE programs can finance energy improvements provide optimum savings for low-income families – allowing them to focus their limited resources on other family needs.

To assist state decision makers in analyzing their policy options across 38 different clean energy policies (including Residential PACE), the Center for the New Energy Economy and The Nature Conservancy have launched the State Policy Opportunity Tracker (SPOT) for Clean Energy. This new resource is a 50-state policy gap analysis where we look at what best practices states have in place and what they are missing. SPOT points out where the Residential PACE state policy gaps remain and we also describe the key elements for any PACE program in a short memo.

Today’s announcement is a key step in a just transition to clean energy for all Americans. State policymakers should make every effort to enable this program for their citizens.

Image courtesy of Harshil Shah and used under a Creative Commons license.