Partially driven by securitization and strong investor appetite, property assessed clean energy (PACE) loans are forecasted to double over the next year and potentially become the fastest growing method of financing in the United States. However, as these loans have ballooned they have come under criticism by consumer and real-estate industry groups.

Key Details

• If authorized by state law, PACE programs allow local governments to provide financing to homeowners and businesses for energy efficiency, renewable energy, and water-saving improvements
• A local government may issue bonds—or pursue other funding mechanisms—to secure funding for a PACE program
• The government loans provided to residents or businesses are secured by an assessment placed on the property and repaid on property tax bills over time
• The unique structure means the debt is tied to the property instead of the property owner. If the property is sold, the repayment obligation transfers to the new property owner
• Originating first in California in 2009, PACE financing programs are now fully operational in 19 states, while an additional 14 states have passed PACE-enabling legislation
• The loans have been controversial for several reasons, most notably for their high interest rates, relaxed underwriting practices, and their seniority over mortgages in situations like default and foreclosure

Implications

PACE financing is still in its early stages of maturity and will likely undergo changes via national lending standards or regulation in the future. However, the growing popularity of the loans demonstrates the critical role that creative financing can play in renewable and energy efficient retrofits and upgrades.

Additional Resources

The Wall Street Journal: Americas Fast-Growing Loan Category Has Eerie Echoes of Subprime Crisis

MarketWatch: These Government-approved High-interest Green Loans Are Turning Mortgage Lending Upside Down

HousingWire: FHA to Begin Insuring Mortgages with PACE Loans

This report is part of the Clean Tech & Sustainability Minute series. To view all featured Minutes, please click here.

Additional Contributing Author: Scott Roulston