Renovate America Welcomes FHA Policy Guidance Endorsing PACE Financing
On July 19, 2016, Cleantech San Diego member company Renovate America, the largest provider of residential Property Assessed Clean Energy (PACE) financing, welcomed the Federal Housing Administration’s (FHA) announcement of clear PACE guidance that will expand access to renewable energy, energy efficiency, and other home resiliency projects for American homeowners. The guidance balances national housing policy priorities with national clean energy imperatives.
The guidance allows residential PACE assessments to interact with single-family home mortgages secured by the FHA in the event of purchases and refinances. PACE programs, such as Renovate America’s HERO Program, allow homeowners through property taxes to repay the entire cost of a home improvement project that affects energy consumption, water consumption, or storm resiliency (depending on state legislation), at a fixed rate over a term based on the useful life of the installed product(s).
“In making the first specific federal housing policy endorsement of PACE, the FHA is recognizing that this innovative form of financing is solving a marketplace failure no other form of financing is solving at scale,” said Renovate America CEO J.P. McNeill. “In saying PACE should be treated as any other property tax assessment and not as a traditional loan product, the FHA gives much greater clarity to state and local governments.”
PACE SOLVES A MARKETPLACE FAILURE
Every year, about one in six American homeowners replaces a product or system in their home that affects the level of energy consumption. Three-quarters of the time, they select a less efficient option based on upfront sticker price, instead of factoring in the total cost of owning and maintaining the product or system over the course of its useful life.
PACE legislation was first enacted in California in 2008 to address this marketplace failure and spur local economies. In the event of a sale, the PACE law allowed the remaining balance on financing for energy efficiency, water efficiency, or renewable energy products to transfer with the property, decreasing the homeowner’s disincentive to make a long-term investment in their home. The idea was that the newly installed, fixed asset stays with the home, helping offset future homeowner utility costs. So, although not required, the buyer who would enjoy the future savings could take over the payments on the remaining balance.
The success of the PACE financing model derives not just from the policy idea of the obligation running with the property, but also from the private sector providers’ ability to assemble and train a network of certified independent contractors, and to build automation tools and databases, and use prudent and responsive underwriting to enable approvals at the time a system has failed or needs an upgrade.
Consumer protections around PACE are unique in home improvement financing: contractors are not paid until the job is complete and done to the homeowner’s satisfaction; contractors must be licensed or verified, bonded, and insured; project prices cannot exceed a fair market value; installed products must meet government efficiency ratings; and post-funding consumer supports include dispute resolution and investigation services on everything from workmanship to marketing violations.
PACE has succeeded where other financing options fail precisely because it successfully provides smart options to homeowners in a moment of need that also serves a broader environmental, economic, and infrastructure goal. Because contractors are not delivering them, other energy efficient financing options are not responsive when the need is the greatest, they are not scoped to broadly serve the affected homeowner population, and they are not as enabled by technology to rapidly convert a decision to a completed job. The leading federally created financing solution, for instance, would require a homeowner to refinance his or her entire mortgage to access the funding needed to purchase solar panels.
POTENTIAL IMPACT OF NEW FHA GUIDANCE
Residential PACE is now available in California and Florida, and will soon expand in Missouri and Colorado as well. Renovate America has funded more than $1.6 billion in upgrades across more than 69,000 households. The installed products have created 13,828 local jobs and are projected to save or generate 10.4 billion kWhs of energy – enough to take one million Americans off the grid for a year. They are also projected to save 5 trillion gallons of water, avoid 2.8 million tons of greenhouse gas emissions, and reduce utility bills for homeowners by $2.8 billion.
Nationwide in 2015, FHA products represented 21.9 percent of mortgage originations at purchase, 13.1 percent at refinancing, and 17.9 percent overall (an increase from 13 percent for the three prior years). This guidance now gives virtually all PACE homeowners the option of an FHA mortgage.
For those people buying a home with a PACE assessment, monthly cost comparisons show FHA may be a more affordable option for buyers who are putting 10 to 15 percent down. For homeowners with PACE who want to refinance, the FHA product allows the PACE assessment to remain with the property.
“The FHA has the broadest credit box of any publicly-backed mortgage product, expanding access to more qualified homeowners,” said Ari Matusiak, EVP of Market Development and External Affairs for Renovate America. “In conjunction with PACE, the pairing with FHA has extraordinary capacity to increase the modernization of the U.S. housing stock and empower more homeowners to achieve their dreams of sustainable and responsible home ownership.”
Not all homeowners will be able to take advantage of all the policy features of PACE, even with FHA clarity. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has not changed its approach to PACE. PACE homeowners will continue to receive clear disclosures that they may need to pay off any remaining balance when the sell or refinance – as they would with other asset-backed financing options.
The new FHA policy accelerates the capacity of Renovate America’s partnerships to reach more homeowners:
- A new partnership with Vivint Solar builds on Vivint Solar’s 76,231 solar installations across 12 states, with total capacity reaching 513 megawatts.
- The Electric & Gas Industries Association (EGIA), has 21,000 registered contractors nationwide, the largest U.S. network of energy-efficiency and renewable-energy contractors, distributors and manufacturers — and estimates that 50 percent of its contractors’ sales volume was financed through PACE in the last two years.
- Sears Home Services is the nation’s largest provider of residential services, with over 6,700 expert technicians making more than 12 million service and installation calls annually nationwide. Sears has helped more than 1,700 homeowners so far in partnership with Renovate America.
- Since partnering with Renovate America in 2014, Lennox and its network of installers have seen their sales of high-efficiency cooling systems more than double in California.
- Owens Corning has seen high solar reflectivity roofing sell at double the rate of its standard roofing during its partnership with Renovate America.