Could PACE Financing Hurt Homeowners?

A big problem with investing in home based renewable energy systems is the length of time required to realize the payoff. Even though such systems reduce the need to buy power from the grid, it's hard for homeowners to capture the savings quickly enough to justify financing the cost.

One solution to this conundrum is called the Property Assessed Clean Energy, or PACE, which adds publicly sponsored loans added to property tax bills to finance renewable energy investments. My friend Tom Konrad at Clean Energy Wonk describes the benefits:

PACE financing is an important program that addresses multiple barriers to energy efficiency. First, it addresses upfront cost: although energy efficiency measures usually pay for themselves, most require an up-front investment which many people have trouble making. PACE financing also helps address split incentives. Because efficiency improvements can take several years to pay back, and most Americans move every few years, the benefits of efficiency don’t always accrue to the people who invest in them. With PACE, the loan used to make the improvement is assessed on the property, so the person who is saving money in energy costs is always the same person who is paying for the energy improvements.

Seems rational to me. But as the Washington Post reports, federal mortgage agencies are urging that the PACE program be put on hold because of concerns that it could hurt homeowners:

The lending is not based on the homeowner's ability to pay, it bypasses consumer protections such as the Truth-in-Lending Act, and it may not lead to meaningful reductions in energy consumption, the FHFA [Federal Housing Finance Agency] said. It could undermine the lenders that provide home mortgages and investors in securities backed by mortgages by changing the economics of those arrangements, the FHFA said.

Konrad looks at these concerns one by one:

Ability to pay. The lending does not need to be based on the borrower’s ability to pay, because the energy improvements improve that ability to pay. For example, Boulder Colorado’s now canceled PACE program required that the homeowner first get an energy audit, which is then used to estimate the cost savings of possible energy improvements. If the homeowner is able to pay for his or her current mortgage (which, supposedly, is based on his ability to pay), then after the energy improvements and the PACE loan, he or she should have better cash flow, and be better able to pay. In other words, PACE should improve the owner’s ability to pay, and actually strengthen the mortgage market.

Consumer protections. Unlike complex mortgages, the most important thing about a PACE loan is that the monthly payment be less than the monthly savings, so they are inherently easier for consumers to understand. But if consumer protections are necessary, there’s no reason they could not be added to PACE lending programs without canceling the whole program, as the FHFA seems to want.

May not lead to meaningful reductions in energy consumption. Quite simply put, this is an attempt to throw the baby out with the bathwater. A good PACE program requires an energy audit and professional installation in order to ensure energy savings. It’s important to design PACE programs carefully, but that’s true for any lending program, or any program whatsoever.

There is nothing fundamentally wrong with the PACE approach; the question is whether the program can be effectively structured and managed to capture the economic benefits of renewable energy.