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The PACE (Property Assessed Clean Energy) program, strongly pushed by the US Department of Energy as the ideal financing model for residential solar panels and energy efficiency, is in trouble. It may have implications for the UK’s PAYS scheme. The bonds are candidates to be called climate bonds.
PACE involves local authorities raising funds with special-purpose Municipal bonds, guaranteed by the federal government, to on-lend to households. Capital is provided to fund projects on demand. Climate Bonds Advisory Panel member Christoph Harwood calls this “buying a bond in tiny pieces”.
The key innovation, first developed by the City of Berkeley, has been to tie the loan to the dwelling rather than the householder, with loan repayments collected through the municipal tax system. This, among other things, removes the “Principal Agent” problem that meant landlords and tenants or people thinking of moving house didn’t invest because it seemed that benefits might flow principally to others.
The scheme has been approved for operation in 22 States; the UK’s nascent Pay As You Save (PAYS) home energy efficiency financing scheme is inspired by PACE.
US mortgage guarantors, backed by the Federal Housing Finance Agency (FHFA), have now confirmed earlier reports that they will not provide mortgage insurance to dwellings encumbered by a PACE loan (and treated as senior debt). It means that homeowners who participated in a program must pay off the loans before they can refinance their mortgages, two government-chartered mortgage companies.
FHFA are concerned that “First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors” – i.e. they think they complicate loan valuations by being senior debt. They’re also worried that “a lack of underwriting standards” could lead to a lot of bad loans being made, adding unwanted risk.
A similar problem could potentially be faced by PAYS in the UK.
The main argument in response to this issue has been that a dwelling-tied loan is not a new thing; the model has been used before and treated, for the purposes of valuation, as a service charge on the property rather than a loan — so it shouldn’t impact on loan valuations. PACE and PAYS loans are really more akin to “assessments”, as the obligation to pay runs with property and passes on sale. FHFA hasn’t bought this yet.
PACE supporters in the US are hoping the federal government will find a way to successfully address these issues or reverse the FHIC ruling.