Who’s in Charge? Property Assessed Clean Energy (PACE) Programs

There is a lot in the news about so-called “big government.”  But we govern ourselves at many different levels, and each level should have clear authority to act in certain ways, and the discipline to restrain itself in other ways.

Have you heard about the conflict between certain local governments — which have authority from their states to use “land-secured financing” — and a federal agency which is fighting them using its oversight of mortgage lenders?

Local governments are using a relatively new financing mechanism to encourage their residents and businesses to invest in energy efficiency and renewable resources. Using “Property Assessed Clean Energy” (PACE) programs, private investors apply “land-secured financing” to residential and commercial building improvements. Monies lent to property owners are secured by liens on the property. Lenders like this security which is paid back through an assessment levied against the property. The assessment, using taxing authority, is transfered to the new property owners if the property is sold. Twenty two states have passed PACE legislation, and several local entities have applied this approach since 2008. These states and local governments have the backing of the White House and USDOE.

Certain federal authorities are not sure this is a good idea. On July 6, 2010, the Federal Housing Finance Agency issued a statement detailing objections to PACE programs. It directed mortgage giants Fannie Mae and Freddie Mac to take precautions. The chief concern is that if a property owner defaults on a mortgage and the property has a PACE lien, repayment of the PACE loan would take priority over the mortgage because property taxes are typically paid first from the proceeds of the sale of a foreclosed home. Consequently, PACE programs across the country have been suspended.

Writing in the third of DEFG’s “Series of Regulatory Choices,” Cynthia Boland, Esq., states:

Though PACE has the potential to both strengthen the retail renewable energy and energy efficiency marketplace and produce critical energy, environment and economic benefits, there is intense debate over whether a municipal government-sponsored lending scheme which poses potential risks to mortgage lenders is a prudent policy and thus best suited to achieve these goals.

Local Governments and Federal Agency Clash Over Property Assessed Clean Energy Programs” presents the status of PACE programs, analyzes the risks, benefits and trade-offs associated with PACE, discusses reactions to the FHFA July Statement, and discusses potential alternative policies.

No one ever said that government was simple, or that execution of any new “rules of the marketplace” would be easy to understand. I would be interested in your reactions to this report and PACE programs.

  • What authority is appropriate at each level of government? When are discipline and restraint called for?  Who needs to be more restrained?
  • If you prefer that “government just leave the marketplace alone,” please comment on the uncertainty of “no rules” — Is that preferable to rules that give certainty to businesses?
  • Finally, what is wrong with local officials using land-secured financing to shape the community’s building efficiency consistent with the values of that community? Would you prefer that they mandate efficiency through building standards, or offer voluntary investment incentives through land-secured financing, or take another approach?

Here is one place to follow PACE financing events as they unfold.

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