BILL ANALYSIS Ó 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 2597 - Ting Hearing Date:
June 17, 2014 A
As Amended: June 5, 2014 FISCAL B
2
5
9
7
DESCRIPTION
Current law authorizes cities, counties, and other local public
agencies and utility districts to provide up-front financing to
property owners to install renewable energy-generating devices,
make specified water or energy efficiency improvements, or
install electric vehicle charging infrastructure on their
properties through a system of voluntary contractual assessments
which is repaid, with interest, through property tax
assessments. The programs are commonly referred to as the
Property Assessed Clean Energy or PACE programs. (Streets &
Highways Code § 5898.10 et seq.)
Current law creates the California Alternative Energy and
Advanced Transportation Financing Authority (CAEATFA) with
myriad programs including the PACE Loan Loss Reserve Program to
reduce the administrative costs of PACE programs and provide a
reserve fund to mitigate risk to first mortgage lenders related
to PACE assessments. Eligibility for the reserve program is
limited to loans less than 10% of the property value and for
distributed generation renewable energy sources, electric
vehicle charging infrastructure, or energy or water efficiency
improvements. (Public Resources Code § 26050 et seq.)
This bill increases the loan cap to 15% of the assessed value of
the property for the first $700,000 in property value, maintains
the existing 10% cap on property values over $700,000, and caps
the loan to value ratio at 100% of the value of the property.
BACKGROUND
CAEATFA - This body was created in 1980 with an authorization of
$200 million in revenue bonds to finance projects utilizing
alternative sources of energy, such as cogeneration, wind and
geothermal power. It was renamed in 1994 as the California
Alternative Energy and Advanced Transportation Financing
Authority and its charge expanded to include the financing of
"advanced transportation" technologies.
During the energy crisis of 2001, its authority was again
expanded, this time to provide financial assistance to public
power entities, independent generators, and others for new and
renewable energy sources, and to develop clean distributed
generation.
CAEATFA consists of five members: the Director of Finance, the
Chairman of the California Energy Commission, the President of
the California Public Utilities Commission, the Controller, and
the Treasurer. Its current mission is to provide financing for
facilities that use alternative energy sources and technologies.
CAEATFA also provides financing for facilities needed to
develop and commercialize advanced transportation technologies
that that conserve energy, reduce air pollution, and promote
economic development and jobs and support energy efficiency
financing efforts.
Property Assessed Clean Energy Bonds/Program - First launched in
California, these programs are being pursued across the nation
by municipalities to accelerate the retrofitting of residential
and commercial buildings with renewable energy and energy
efficiency improvements. California authorizes PACE financing
to be used for renewable energy generation, energy or water
efficiency retrofits, or electric vehicle charging stations for
residential and commercial properties. Property owners in a PACE
district can use financing to retrofit their home or business
with no money down and pay the assessment through their local
property tax bill. PACE assessments "run with the land" and will
transfer to a buyer upon the sale of the property unless the
buyer requests that the obligation be satisfied in escrow.
In July of 2010, the Federal Housing Finance Agency (FHFA)
raised concerns regarding the effects of PACE liens on mortgages
held by Fannie Mae and Freddie Mac. Due to these concerns, in
August of 2010 Fannie Mae and Freddie Mac announced that
mortgages for homes with first lien priority PACE obligations
would no longer be purchased, leading many PACE administrators
to suspend their residential programs.
PACE Loss Reserve Program - The PACE Loss Reserve Program was
authorized in 2013, administered by CAEATFA, to address FHFA's
financial concerns by making first mortgage lenders whole for
any losses in a foreclosure or a forced sale that are
attributable to a PACE loan. If a mortgage lender forecloses on
a home that has a PACE lien, the reserve can be used to cover
PACE payments during the foreclosure period. Alternatively, if a
local government sells a home for unpaid taxes and the sale
price falls short of the outstanding tax and first mortgage
amounts, the reserve can be used to cover the shortfall (up to
the amount of outstanding PACE payments). By covering these
types of losses, the Program puts the first mortgage lender in
the same position it would be in without a PACE lien.
The $10 million Loss Reserve is just underway and will be
available for all PACE loans issued by enrolled PACE programs
and reported to CAEATFA for the length of their terms. PACE
programs will report to CAEATFA semi-annually and pay a small
administrative fee based on the principal amount of new loans
they issue.
It is critical to note that, according to CAEATFA, that the FHFA
has yet to green light this program as adequate protection for
its first mortgage sector and have in fact restated their
initial concerns with the PACE structure. Nevertheless it rolls
forward and could be for naught.
COMMENTS
1. Author's Purpose . In 2013, the Legislature created the
PACE Loss Reserve Program administered CAEATFA and
authorized a $10 million reserve fund to keep mortgage
interests whole during a foreclosure or a forced sale.
Statute limits the value of assessments receiving
assistance to less than 10% of the property value. This
restrictive criteria precludes property owners in less
affluent areas from participating in PACE and does not
match current PACE program practices.
AB 2597 clarifies that PACE assessments are special tax
assessments, rather than loans, and updates the value of
eligible improvements financed by PACE to up to 15% of the
property value for the first $700,000 of property value.
Any remaining value on the property after the initial
$700,000 would remain at the existing 10%.
2. Federal Housing Finance Agency (FHFA) . The first
commercial and residential PACE programs were established
in 2008 but the residential programs soon encountered a
significant hurdle. FHFA was concerned that residential
PACE assessments had a lien status superior to that of
existing mortgages underwritten by Fannie Mae and Freddie
Mac. This meant that, in the event of a default, any
outstanding PACE assessments (though not the entire amount
financed) would be paid off before other liens such as
first deeds of trust.
In 2010, Fannie Mae and Freddie Mac stated that they would
no longer purchase mortgage loans secured by properties
with outstanding PACE loans. This effectively stopped
residential PACE programs, with the exception of a few
pilot programs. In response the Legislature authorized
CAEATFA to establish a loan loss reserve program which will
fund any losses encountered at the local level in the event
that a mortgagee defaults on their assessments which will
eliminate the risk of loss to the first mortgage holder
including Fannie Mae and Freddie Mac. Although the program
moves forward, those entities have yet to give the green
light to California that this reserve program is an
adequate backstop to mitigate the risk to first mortgages.
3. Underwriting Standards for PACE Programs . At the local
level PACE financing is limited by capping the total amount
of a property owner's annual property taxes and assessments
at 5% of the property value. Local governments do not have
to utilize the CAEATFA reserve but if they do the eligible
financing is limited to financing capped at 10% of the
value of the property. This cap is common to PACE programs
and was recommended by the White House and the U.S.
Department of Energy (DOE) as a "best practice" in their
2010 guidelines which were designed to help ensure prudent
financing practices during the pilot PACE programs. The
DOE recommended that, "as a general matter, PACE
assessments should not exceed a certain percentage of
appraised value of the home, generally 10%."
This bill proposes to increase the cap to 15% of the value
of the property up to $700,000. The author reports that
"this restrictive criteria precludes property owners in
less affluent areas from participating in PACE and does not
match current PACE program practices." For example,
under current law a home with an appraised value of
$200,000 would provide an owner with $20,000 of financing.
Under this bill, the owner's financing could be increased
to $30,000.
The committee was not able to locate any research or
analyses on whether there have been any adverse
consequences of PACE assessments/financing on residential
lenders, borrowers, or the FHFA. Additionally, the DOE has
not issued any revisions to its 2010 best practices. The
shortage of information is likely because of the slow
growth of residential PACE due to the FHFA concerns.
Consequently, there is no research or experience to lay a
foundation for the change in loan to value except for the
desire to increase financing opportunities for residential
property owners in less affluent areas.
The committee should consider whether the cap increase to
15% is at a level that increases the financial liability of
the state program which is funded by electric ratepayers
and is a policy to be encouraged given the state's recent
experience with the housing crisis.
4. Underwriting Standards - Equity Cap . This bill also
adds a loan to value cap of 100% which is new to statute
and a worthy effort to prevent an owner from being
underwater. An owner's total outstanding debt on the
property, including the PACE financing, mortgages and any
other leans, could not exceed 100% of the property's fair
market value. But this policy could leave an owner no
equity in their property - on paper. The statement is a
bit awkward since the financing runs with the land and can
pass to a subsequent buyer. Nevertheless if the home drops
in value, the buyer would be underwater, and it's not clear
whether financing for the buyer would be jeopardized
because the debt would exceed the property value.
Additionally, sponsors report that roughly 25% of the
property with PACE liens which has been transferred in the
last two years did result in a "pay-off" of the PACE
assessment upon transfer. This transaction would be
severely limited if the seller/owner had no equity in the
property.
There were no best practices in the DOE guidelines on this
issue. However, the FHFA did comment in the Federal
Register, as part of a never-adopted regulatory package on
PACE, that:
Estimated property value should be in excess of
property owner's public and private debt on the
property, including mortgages, home equity lines of
credit (HELOCs), and the addition of the PACE
assessment, to ensure that property owners have
sufficient equity to support the PACE assessment.''
This appears to permit the imposition of PACE liens
that would leave the property owner with only nominal
equity in the property. As recent experience has
shown, circumstances in which homeowners have little
or no equity in the property can be extremely risky
for mortgage holders; FHFA does not believe that an
underwriting criterion that allows a PACE project to
reduce a homeowner's equity in the property to
essentially zero provides adequate protection to
mortgage holders.
The committee should consider whether, in light of recent
housing crisis, it is wise to encourage 100% debt to
property value ratio and whether the cap should be lower.
5. Related Legislation . AB 1883 (Skinner) allows a public
agency to transfer voluntary contractual assessments, if
bonds have not been issued. Status: Pending consideration
by the Senate Committee on Governance and Finance.
ASSEMBLY VOTES
Assembly Floor (75-0)
Assembly Appropriations Committee (17-0)
Assembly Natural Resources Committee
(6-0)
Assembly Revenue and Taxation Committee
(8-0)
POSITIONS
Sponsor:
Renewable Funding, LLC
Sonoma County Energy Independence Program
Western Riverside Council of Governments
Support:
Breathe California
California Municipal Utilities Association
California State Association of Counties
Sierra Club California
Oppose:
None on file
Kellie Smith
AB 2597 Analysis
Hearing Date: June 17, 2014