By Ryan Reed, Staff Contributor
Property Assessed Clean Energy (PACE)
Energy usage by commercial and residential properties is a major contributor to total U.S. greenhouse gas emissions, and the Property Assessed Clean Energy (PACE) program could play a major role in limiting its growth. In 2014, electricity production accounted for 30 percent of total greenhouse gas emissions in the U.S. Further, almost 40 percent of energy used in the U.S. comes from commercial and residential properties combined, 18.71 and 20.74 percent respectively. By providing an alternative form of funding for energy efficiency and renewable energy projects, PACE creates an opportunity for commercial and residential properties to both decrease their total electricity usage and to generate more through renewable sources. The problem, however, is that the program’s residential growth has been stunted as the commercial side thrives.
PACE is a funding mechanism where municipalities form special tax districts to help individuals undertake activities that increase the energy efficiency, renewable energy, and water conservation of their residential and commercial units. States pass legislation which allows municipalities to create area-specific PACE programs. Property owners then apply to their local PACE organization for project-specific loans, which are usually funded through municipal bonds. Projects are considered based upon several factors, including equity held in the home, and whether the individual property owner is current on property tax and mortgage debt.
PACE is unique from standard bank loans for several reasons, including:
- The loan receives a primary lien on the property. 
- The loan is attached to the home, instead of the individual. This means that individuals will no longer be responsible after they sell the house.
- The loan requires no upfront capital.
- The loan is paid through the property tax bill, which occurs in yearly payments instead of monthly installments.
- PACE provides post-funding support for complaints as well as for selling and refinancing.
- PACE considers home equity and other factors for fund availability, but not credit or income.
Currently, there are four states with active residential PACE programs; California, Missouri, Georgia and Florida. The program, thus far, has upgraded 145,000 homes in projects that have cost approximately $3.6 billion. Conversely, the commercial PACE program has done a relatively smaller amount of business, $340 million dollars on 1020 projects, but is seeing more large projects like the $10 million solar installation at a Pacific Ethanol plant in California. 22 states, plus Washington, D.C., currently have an active commercial PACE program.
Slow Residential PACE:
While residential PACE has accounted for $3.6 billion in project funding thus far, it has far greater potential because of its ability to fund important resilience work, create jobs and potentially increase housing prices. Residential PACE has struggled to expand beyond is current three-state purview in large part because the federal government has refused to purchase or guarantee mortgages with a PACE loan. This is particularly significant in the case of Fannie Mae and Freddy Mac, housed by Federal Housing Finance Agency (FHFA), which combine to own 45.9 percent of the residential mortgage market.
The regulatory focus on PACE began in 2010, when the FHFA issued a letter stating that Fannie Mae and Freddie Mac would not “purchase mortgage loans secured by properties with an outstanding PACE obligation unless the terms of the PACE program do not permit priority over the first mortgage liens.” This view has prevailed. In June, 2016, the FHFA General Counsel Alfred Pollard stated that FHFA cannot sanction first-lien status PACE programs, or those with subordinated liens which travel with the home on foreclosure. This means that property owners with a PACE loan cannot refinance using Freddie Mae and Freddie Mac, nor can somebody buy a property that has a PACE lien on it using a loan from those sources. Other agencies, such as the Department of Housing and Urban Development (HUD), have in the past refused to insure mortgages with a PACE loan attached.
There are several reasons that the FHFA, and the mortgage industry as a whole, has reservations about the PACE program. The program is mainly self-regulated for consumer-protection, which is especially difficult because contractors often end up serving as quasi-loan originators. There is concern that people will be pushed into loans that they cannot pay back, despite the purported energy savings. Further, the mortgage holder may not receive a full payout in the event of foreclosure if a PACE loan has received primacy and the mortgage holder is not able to anticipate this issue as most PACE loans are added after the mortgage. Finally, there is concern that subordinated PACE loans that travel with the property would still lower housing prices at foreclosure and therefore cost mortgage holders money.
Some of these concerns are being assuaged by the PACE program. In February, 2017 the program updated its consumer protection policies to adopt key pieces of the Department of Energy best practices guidance. This includes comprehensive disclosure with a three day right to cancel, confirmation conversations for each sale, and a forbearance program for homeowners who suffer a financial hardship. PACE programs will also begin to collect monthly household income and debt obligation data in an effort to create income-based requirements, addressing one of the major concerns cited by Mr. Pollard. California has also recently passed Assembly Bill 2693 which imposes disclosure requirements on PACE programs.
Governor Jerry Brown also attempted to solve concerns that mortgage holders would not be paid back in the event of foreclosure. California implemented a $10 million loan-loss reserve fund in order to pay mortgage holders in the event of foreclosure. This, however, does not appear to have assuaged FHFA’s fears, which may be because the fund would only cover approximately 35,700 foreclosed homes.
There was some movement towards accepting PACE during the end of the Obama Administration. In particular, HUD and the Department of Veteran Affairs agreed to insure mortgages of homes with PACE obligations under certain requirements. As the new administration settles into place, it will be interesting to watch whether the attitude continues to relax towards residential PACE loans. For its part, PACE should continue to work to limit the FHFA concerns by gathering data to show that the program increases property value and will not cost mortgage holders money in the event of foreclosure.
 PACE is made up of a number of different individual programs, but will referred to alternatively as “PACE” or “the program” for simplicity.
 Approximately 67 percent of this total came from burning fossil fuels, predominantly coal and natural gas. Sources of Greenhouse Gas Emissions, U.S. Envtl. Protection Agency, https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions (Last visited Mar. 8, 2017).
 Bethany Speer & Ron Koenig, Property Assessed Clean Energy (PACE) Financing of Renewables and Efficiency, National Renewable Energy Laboratory (July 2010), http://www.nrel.gov/docs/fy10osti/47097.pdf.
 Property Assessed Clean Energy, PACENation, http://pacenation.us/wp-content/uploads/2016/10/PACEBasics_2016_10_7.pdf (Last visited Mar. 8, 2017).
 Speer & Koening, supra note 4.
 Chris Cowell, What to Know About 2017 PACE Financing Consumer Protection Policies, Solar Builder (Jan. 13, 2017), http://solarbuildermag.com/news/what-to-know-about-2017-pace-financing-consumer-protection-rules/.
 PACE loans will automatically gain primary lien position because they are added as property tax assessments, but some states have purposefully required that they be subordinated. Energy Policy Innovation Council, Property Assessed Clean Energy (PACE): What is it, and can it be implemented in Arizona? Arizona State University 2 (Feb. 2014), https://energypolicy.asu.edu/wp-content/uploads/2014/02/PACE-brief-sheet-update.pdf.
 The hope of the program is that individuals will be able to immediately pay for their increased property tax through savings on energy use. Id.
 PACE Consumer Protection Policies, PACENation at 5 http://pacenation.us/wp-content/uploads/2016/08/PACENation-CPP-V1-2016.05.10.pdf (Last visited Mar. 25, 2017).
 This project is expected to lower electric costs by $1 million per year for the plant, while also allowing them to qualify for a federal Business Energy Investment Tax Credit. Mark Anderson, Pacific Ethanol Scores Big on Funding for $10 Million Solar Project, Sacramento Bus. J. (Sept. 26, 2016), http://www.bizjournals.com/sacramento/news/2016/09/26/pacific-ethanol-scores-big-on-funding-for-10.html.
 PACE estimates that its residential program has created 36,000 jobs. Job growth was cited as one reason that Virginia gave a $500,000 grant to increase commercial PACE in 2017. New Program to Create More Clean Energy Jobs in the Commonwealth, Augusta Free Press (Feb. 20, 2017), http://augustafreepress.com/new-program-create-clean-energy-jobs-commonwealth/.
 There is not a lot of available data on how PACE affects housing prices, but one study of 773 homes in California found that houses sold for between $199 and $8,882 over prices for comparable homes without PACE-funded projects, after taking into consideration financing costs of the project. Laurie Goodman & Jun Zhu, PACE Loans – Does Sale Value Reflect Improvements? Institutional Inv. J., Winter 2016, https://s3-us-west-1.amazonaws.com/cdn.heroprogram.com/newsarticles/Executive+Summary.pdf.
 VW Staff, Fannie Mae: Who Owns the U.S. Mortgage Market, Value Walk (Mar. 7, 2016), http://www.valuewalk.com/2016/03/fannie-mae-who-owns-the-u-s-mortgage-markets/.
 Fannie Mae, “Options for Borrowers with a PACE Loans”, Announcement SEL-2010-12, (August 31, 2010) available at https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/sel1012.pdf; Freddie Mac, “Bulletin 2010-20” (August31, 2010), available at http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1020.pdf
 Keeping up with PACE: A Joint Oversight Hearing on Residential Property Assessed Clean Energy (PACE) Programs: Hearing Before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee (Ca. 2016) (statement of Alfred M. Pollard, General Counsel, Federal Housing Finance Agency).
 Phill Hall, Watt Reaffirms Ban on PACE Program Loans, Nat’l. Mortgage Prof. Mag. (Jan. 2017), http://nationalmortgageprofessional.com/news/52573/watt-reaffirms-ban-pace-program-loans.
 HUD reversed this policy in July, 2016. U.S. Dept. of Housing and Urban Development, Mortgagee Letter 2016-11, Property Assessed Clean Energy (2016), https://portal.hud.gov/hudportal/documents/huddoc?id=16-11ml.pdf.
 The program’s failure to consider individual property owner’s income and debts, as well as the incentives on contractors to push people into projects could raise the default rate, which is currently under one percent. Moneytips, Will PACE Loans Cause the Next Housing Crisis?, Huffington Post (Feb. 10, 2017), http://www.huffingtonpost.com/entry/will-pace-loans-cause-the-next-housing-crisis_us_589db386e4b0e172783a9ae9.
 There is not significant data available to determine whether this is true, and this is something that PACE programs should look to debunk. One study, noted above, did find some evidence that foreclosed homes with PACE-financed projects are sold for more overall, but the sample size was admittedly small. Laurie Goodman & Jun Zhu supra note 21.
PACENation Sets New Standards for Consumer Protection, PACENation, http://pacenation.us/pacenation-sets-new-standards-consumer-protections/, (Last visited Mar. 8, 2017).
 PACE Consumer Protection Policies, Version 2.0, PACENation at 6 (Feb. 14, 2017), http://pacenation.us/wp-content/uploads/2017/02/PACENation-Consumer-Protection-Policies-v2.0-02.17.17-with-attachments.pdf.
 Bob Hunt, PACE Loans Should Now Receive Greater Scrutiny, Realty Times (Jan. 24, 2017), http://realtytimes.com/consumeradvice/mortgageadvice/item/50103-20170124-pace-loans-should-now-receive-greater-scrutiny.
 John Farrell, California’s Reserve Fund Won’t Lift the FHFA Boot from PACE’s Neck, Inst. For Local Self-Reliance (July 15, 2014), https://ilsr.org/californias-pace-program-solve-fanniefreddie-problem/.
 This includes the requirement that the PACE loan has a subsidiary lien position, and that the existence of the PACE obligation is readily available to all relevant parties. This guidance allows PACE to travel in the event of foreclosure. U.S. Dept. of Housing and Urban Development supra note 26. See also U.S. Dept. of Veteran Affairs, Circular 26-16-18, Property Assessed Clean Energy (PACE) Loan Processing (2016), http://www.benefits.va.gov/HOMELOANS/documents/circulars/26_16_18.pdf (VA agrees to insure mortgages of homes with PACE obligations on the same day as HUD).