Solar panels are just one of the things PACE loans are used for. Image from Clownfish on Flickr.
PACE loans, otherwise known as Property Assessed Clean Energy Bonds, are quick personal loans provided by cities to homeowners. Intended to finance energy-efficiency upgrades and retrofits, these PACE loans are paid off as a part of the property taxes on a house. Fannie Mae and Freddie Mac, along with the Federal Housing Finance Agency, though, have muscled these loans out of the market.
How PACE loans work
PACE loans, which have been used everywhere from San Fransisco to New York City, are “bond-backed loans.” Basically, the a homeowner gets finance loans for energy improvements from the city. The city then turns around and sells these loans as bonds. When time comes for the homeowner to pay off these loans, the money is simply added to the taxes for the house. The energy improvements, such as solar panels or extra insulation, stay with the house — and so do the payments. These loans are a way for cities to help their residents finance personal installment loans that move each city towards energy independence. The federal stimulus package helps provide the money to get these programs going.
The problem with PACE loans
If PACE loans are a way for cities and housing to improve and for the country to move toward energy independence, why are federal agencies such as the Housing Finance Agency against them? In short, because they might not get paid. If a mortgage enters default or foreclosure, the bank or mortgage holder can try to sell the house to make back its money. However, liens such as property taxes have to be paid before the mortgage lender gets any money. Because PACE loans are paid as a part of property taxes, this means they get paid back before the mortgage lender if the mortgage goes into default.
Will PACE Loans continue?
No federal agency has yet taken action to shut down PACE loans, officially. However, many mortgage lenders are tightening standards for their mortgage installment loan programs in places where PACE is available. House Energy and Commerce Committee Chairman Henry Waxman and House Financial Services Committee Chairman Barney Frank have written a letter “urging officials to work together quickly to resolve the uncertainty surrounding PACE programs.” No word yet on what the end result of this letter, and this conflict, will be.
