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A Big Year for Clean Energy Loans?

Industry experts are predicting (and warning) that a decade-old retrofit program will finally boom.

PACE is the single most successful energy retrofit program in the history of California, perhaps the nation. Or so says Cisco DeVries, who is a bit biased. DeVries pioneered property assessed clean energy (PACE) financing, which is essentially a loan designed to encourage residential and commercial property owners to buy energy-efficient solar panels, lighting, window insulation and air-conditioning units, among other upgrades.

PACE has already financed more than $2 billion in clean energy improvements to more than 95,000 homes and created about 25,000 jobs, according to the advocacy group PACENation. In California, it is estimated to save about $2.5 billion in utility bills. 

Despite that success, PACE has been slow to take off. It turns 10 this year, and while it’s been authorized in 33 states and the District of Columbia, it’s only active in 19 states and the District. California accounts for most of that activity. Connecticut is a far second.

In an era when most governments are looking to cut greenhouse gas emissions as part of ambitious climate goals, it’s surprising to observers like DeVries that not more are using PACE. “It costs zero dollars for governments to put in place,” he says, explaining that under the program, energy retrofits to a house are paid for by municipal bonds. The homeowner then pays back the loan over 20 years through his or her property tax bill. Governments typically contract the program out to third parties to run. 

PACE’s slow start is attributable to the less-than-opportune time it got underway. The first PACE program was in Berkeley, Calif., in 2007. Then the housing bubble burst and the Federal Housing Finance Agency (FHFA) prohibited Fannie Mae and Freddie Mac from purchasing loans with PACE liens, citing concerns about taxpayer risk because PACE loans get paid back before mortgages in the event of a default and foreclosure. “That [caution] was understandable at the time because the agency was concerned about homeowners taking on more debt,” says Richard Chien, a senior program specialist with the San Francisco Department of the Environment. He says his city and county, like “98 percent of other municipalities,” stopped offering residential PACE as a result.

Nevertheless, some places -- namely Riverside County in Southern California -- persisted. “They went ahead despite FHFA and offered residential PACE,” says Chien. “They generated hundreds of millions in projects and demonstrated that there was demand for it.” 

To further quell concerns, California Gov. Jerry Brown in 2013 created a $10 million loan-loss reserve fund to cover any costs in the event there were defaults resulting from PACE projects. 

With the housing crisis largely in the rearview mirror, industry executives are predicting that PACE could be the fastest-growing type of financing in the U.S. in 2017. Renew Financial, one of the largest purveyors of PACE financing, says it expects to close $1 billion in deals this year, outpacing all nine years it has been in business. But those predictions are also bringing warnings. A recent Wall Street Journal article reported that as “the loans spread, so do problems that echo the subprime mortgage crisis.”

The article recounted the story of one homeowner who saw her annual property tax bill skyrocket from $1,215 to $6,500. DeVries, who is CEO of Renew Financial, says there will be problems -- especially because the program is still so new. But situations like the one cited, he says, are rare. He points out that with more than $2 billion in PACE projects completed in California, the loan-loss reserve hasn’t spent a dime. What’s more, the default on PACE homes is less than 1 percent, which is lower than the California average, and no foreclosure has been initiated by a PACE program.

Still, California has moved to strengthen PACE protections. In addition to the loan-loss reserve fund, Brown signed into law last year a new disclosure requirement modeled after the federal mortgage “Know-Before-You-Owe” form, which helps customers better understand the terms of PACE financing. Another consumer protection bill has been introduced in the state Senate that would enhance the requirements, guidelines and procedures to which PACE programs administered by third parties such as Renew Financial must conform.

Elizabeth Daigneau is GOVERNING's managing editor.
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