Several states have recently enacted laws that authorize localities to create new energy efficient loan programs that generally rely on the placement of a first priority lien to secure energy efficient home improvements. Programs under these laws are sometimes referred to as Energy Loan Tax Assessment Programs or Property Assessed Clean Energy programs. PACE programs allow property owners to borrow against their property taxes to fund energy efficiency improvements much like similar assessments that fund new sewer systems, underground power lines and even mosquito abatement districts. Bonds are sold to fund the improvements on the front end, and property owners pay back the assessments over time through an increase in their property taxes.
HB 5640 recently introduced by State Rep. Rebekah Warren (D-Ann Arbor) would create the "Property Assessed Clean Energy Act" or "PACE Act" authorizing local unit of governments to establish programs to make loans to private property owners in a specified district or districts for energy efficiency improvements or the installation of renewable energy systems, as defined in the bill. The loans would be repaid primarily through assessments on the property under a contract between the local unit of government and the property owner. The local unit of government could issue bonds or notes under the Revised Municipal Finance Act or use other funds to make loans to property owners. The bonds would not be general obligation bonds except that a local unit could issue general obligation bonds to pay for a reserve fund or to pay for legal or other costs associated with setting up the program.
In accordance with the procedures described in the bill, a local unit of government (county, township, city, or village) could establish a PACE program, under which it could create one or more "districts" from time to time. Under the program, the local unit of government could enter into a contract with the record owner (meaning fee title holder or land contract purchaser) of private property within a district to finance or refinance (1) energy efficiency improvements, as defined in the bill, on the property; or (2) the acquisition, installation, and improvement of one or more renewable energy systems, as defined in the bill, through assessments upon the property.
The contract would have to provide for the repayment of the cost of the energy efficiency improvements or the renewable energy systems through assessments on the property. The financing or refinancing could include the cost of materials and labor necessary for the installation; permit fees; inspection fees; application and administrative fees; bank fees; and all other fees that might be incurred by the property owner under the installation on a specific or pro rata basis, as determined by the local unit of government.
A PACE program assessment, including any interest or penalty on an assessment, would constitute a lien against the property until paid in full. The lien would run with the property and have the same priority and status as other property tax and assessment liens. The local unit of government would have all rights in the case of delinquency in the payment of an assessment as it does with respect to delinquent property taxes. When the PACE assessment, including any interest and penalty, was paid, the lien would be removed from the property.
This could be a double-edged sword for credit unions. Either the property could improve in value due to the energy improvements, thus negating the effect of the lien, or it could force mortgage liens to become secondary to energy improvement liens, inhibiting mortgage lending in Michigan, especially in this era of flat-to-decreasing home values.
Freddie Mac has begun to receive questions about these new energy loan programs. They recently released an Industry Letter to remind Seller/Servicers that an energy-related lien may not be senior to any Mortgage delivered to Freddie Mac and they would not accept loans that included PACE liens. What the Freddie and Fannie policy means is that any credit union that once sold mortgage loans to either of the GSEs will not be able to sell them mortgages that are subject to a PACE lien. If such credit unions cannot sell such loans, according to CUNA, they will not originate them since they would be subject to the same credit risk that has concerned Freddie and Fannie.
San Francisco and other counties and cities have suspended energy efficiency financing programs for homeowners because of lending guidance issued by the country’s largest home loan purchasers. The fallout is that nearly all PACE programs are stalled. The issue for Fannie Mae and Freddie Mac is that the lien added to the home loan that guarantees property owners will pay back the improvements has senior lien status. That means the energy efficiency improvements would be paid back before the mortgage in the case of a loan default. Neither Fannie Mae nor Freddie Mac has issued a public statement about the PACE guidance but they do buy more than 70 percent of new home loans from lenders.
Recently, the NCUA also released a statement warning credit unions of their involvement in PACE loans and encouraging them to understand the implications of the PACE loan program. The NCUA and MCUL support the goal of encouraging responsible financing of energy efficient and renewable energy home improvements but not at the cost of the safety and soundness of credit union members. The MCUL is currently opposed to the House passed version of the bill but is neutral on the Senate substitute, because it would only apply PACE liens to commercial properties and require mortgage holder consent before a PACE lien could have senior status.
This bill was recently reported out of the Senate Committee on Local , Urban and State Affairs advancing to the full Senate.
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Regulatory Affairs
