HomeMy WebLinkAboutRes 2010-65 - Amnd EIP Rprt & Admin Guidelines ��
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STAFF REPORT ----�-���--�.
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REQUEST: ADOPT RESOLUTION 2010- 65 DECLARING ITS INTENTION TO
AMEND THE ENERGY INDEPENDENCE PROGRAM (EIP) REPORT
AND ADMINISTRATIVE GUIDELINES AND SETTING A PUBLIC
HEARING THEREON
SUBMITTED BY: Martin Alvarez, Redevelopment Manager
DATE: August 26, 2010
CONTENTS: Resolution No. 2010- 65
May 7, 2010 U.S. Department of Energy Guidelines
July 6, 2010 FHFA Statement
Recommendation
Waive further reading and adopt Resolution No. 2010- 65 , a Resolution of
the City Council of the City of Palm Desert, California, declaring its intention
to amend the Energy Independence Program Report and Administrative
Guidelines prepared pursuant to Section 5898.22 of the California Streets
and Highways Code and setting a Public Hearing thereon.
Executive Summary
Approval of staff's recommendation will adopt a resolution declaring the City Council's intent
to amend the City's Energy Independence Program Report and Guidelines to coincide with
the U.S. Department of Energy's Guidelines currently available for the pilot program known as
"Property Assessed Clean Energy (PACE) Financing Program." The resolution will also set a
public hearing date of September 23, 2010, to receive public input. Following the public
hearing, the City Council may adopt the guideline modifications allowing the City to release the
current suspension of the City's Energy Independence Program.
Backqround
On July 21, 2008, the Governor signed into law AB 811, which amended Chapter 29 of Part
3 of Division 7 of the California Streets and Highways Code (as amended, the "Act"). The
bill authorized cities and counties to establish a program to enter into contractual
assessment agreements with property owners to finance the installation of distributed
generation renewable energy sources or energy efficiency improvements that are
permanently fixed to real property.
On August 28, 2008, the City Council approved Resolution No. 08-89, which established the
City's Energy Independence Program Report and Administrative Guidelines (the "EIP
Report") prepared pursuant to Section 5898.22 of the California Streets and Highways
\1srv-fil2k3\groupsUda\Martin Alvarez�2010\SR\Eipmods8-26-10-2.doc
Staff Report
Adopt Resolution for its Intention to Amend EIP Report
August 26, 2010
Page2of4
Code. The City Council has made amendments to the EIP Report twice since its adoption,
June 25, 2009 and January 14, 2010.
Since July 2008, at least 22 states, with the first state being the State of California, have
adopted state legislation authorizing land-secured assessment financing by local governments
to fund energy e�ciency and renewable energy improvements on private property (commonly
known as "Property Assessed Clean Energy" (PACE).
On May 7, 2010, the U.S. Department of Energy released its "Guidelines for Pilot PACE
Financing Programs" (the "May 2010 DOE Guidelines"), which provides best practice
guidelines to help implement the October 18, 2009, White House Policy Framework for PACE
Financing Programs.
Although the EIP was formed and commenced operations prior to the issuance of the May
2010 DOE guidelines, the EIP's practices and underwriting guidelines are substantially
compliant with the May 2010 DOE Guidelines, and in some instances EIP's requirements
exceed requirements of the May 2010 DOE Guidelines.
Additionally, the Federal Housing Finance Agency(FHFA) is the federal regulatory agency that
oversees Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal
Home Loan Mortgage Corporation), government sponsored enterprises that purchase a large
segment of single-family home mortgages from lenders.
On July 6, 2010, the FHFA issued a guidance statement to Fannie Mae and Freddie Mac (the
"July 2010 FHFA Statement")that:
1. Expresses its concerns that the absence of robust underwriting standards to protect
homeowners among priority lien PACE programs across the nation raises mortgage
safety and soundness concerns for the mortgage lender.
2. Although allowing a waiver for homeowners who prior to July 6, 2010, obtained a
PACE-like loan (such as a loan under the EIP), directs Fannie Mae and Freddie Mac
as of July 6, 2010, to tighten certain mortgage lending underwriting criteria in PACE
jurisdictions and to enforce the provisions of their Uniform Security Instruments
prohibiting a property owner from incurring a senior lien on the property (such as an
assessment under the EIP)without the consent of the mortgage lender.
Status of EIP
As an initial response to the July 2010 FHFA Statement and in an effort to protect its
participants, the City Council announced the temporary suspension of the EIP and the
processing of all residential EIP applications as of July 8, 2010. The City would only honor EIP
contracts entered into prior to July 6, 2010.
Since the launch of Phase III funding in February 2010, the Office of Energy Management
(OEM) has accepted 62 new EIP applications for a total of $1,248,599.50. Of the 62
applications, 37 EIP applicants were notified that their contracts were executed prior to the
P6401.0001\1253672.t
Staff Report
Adopt Resolution for its Intention to Amend EIP Report
August 26, 2010
Page 3 of 4
July 6, 2010; therefore, grandfathered in by the FHFA. The remaining 25 applicants were
notified that the City suspended processing their application.
Proposed Amendments to the EIP and EIP Report
The Energy Committee met to discuss DOE Guidelines and the FHFA Statement, and
recommended lifting the suspension of the EIP. In order to lift the suspension, our legal
counsel indicated that it would be prudent to provide additional protections to homeowners
participating in the EIP by further amending the EIP Report (i) to implement such additional
measures as are necessary for the EIP to comply with all of the best practices recommended
in the May 2010 DOE Guidelines, (ii) to provide supplemental disclosure to EIP applicants as
to the July 2010 FHFA Statement and the implications thereof, and (iii) to make other changes
that the City Manager determines are necessary to achieve such additional protections, as set
forth in the EIP Report.
The amendments to the EIP Report proposed will be brought before the City Council as a
public hearing on September 26, 2010. Below is a summary of the proposed amendments to
the EIP Report and Guidelines to comply with all of the best practices recommended in the
May 2010 DOE Guidelines, which include the following concepts:
1. Clarification of EIP features and requirements that result in an expected savings-to-
investment ratio (as defined in the May 2010 DOE Guidelines)that is greater than one.
2. Notice to mortgage holders when residential property owners fund improvements under
the EIP.
3. Disqualification from further work under the EIP of contractors whose work with respect
to EIP improvements fails to meet City inspection requirements even after such
contractors are provided opportunities to remedy shortcomings.
4. A requirement that the amount financed under the EIP may not include the amount of
any expected direct cash rebate for the improvements selected.
5. An additional disclosure as to effective interest rate including all program fees
consistent with the Good Faith Estimate of the Real Estate Settlement Procedure Act.
6. Clarification that the City's right to inspect property owners' books and records relating
to the improvement includes utility bills for the purpose of collecting data to evaluate
efficacy of the EIP.
7. Clarification and an express requirement that estimated property value should be in
excess of a property owner's aggregate public and private debt on the property.
8. Precautions to determine the property owner's 3-year history of payment of property
taxes and 7-year history of bankruptcy.
P6401.0001\1253672.1
Staff Report
Adopt Resolution for its Intention to Amend EIP Report
August 26, 2010
Page 4 of 4
Additionally, as noted above, the amendments to be presented at the September 23, 2010,
meeting will include the following additional modification:
9. A supplemental disclosure to EIP applicants regarding the July 2010 FHFA Statement
and the implications thereof (e.g., potential (a) acceleration of the repayment
obligations due under such security instrument, (b) unwillingness of the lender to
permit refinancing of the existing mortgage loan unless the owner first repays the
entire amount of the EIP energy assessment, or (c) unwillingness of the lender to
permit sale or transfer of the property unless the owner first repays the entire amount
of the EIP energy assessment).
As ordered in the attached resolution, the Redevelopment Manager will work with staff and
legal counsel to prepare these amendments to the EIP Report, and will place the EIP
Report on file with the City Clerk to be available for review prior to the September 23, 2010,
public hearing. The proposed amendments to the EIP Report will be reviewed by the
Energy Committee for its recommendation to the City Council prior to the September 23,
2010, City Council meeting.
Staff recommends approval of the attached resolution declaring the City's intent to modify
the EIP Guidelines after a public a hearing is held on September 23, 2010.
Submitted By: Department Head:
,
. �
M� in Alvarez, Re e ent Manager J in cCarthy, A edevelopment
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Paul S. Gibson, ir c r of Finance
Approval:
�
Jo . Wohlmuth, C' nager
P6401.0001\t 253672.1
RESOLUTION NO. 2010- 65
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM
DESERT, CAUFORNIA, DECLARING ITS INTENTON TO AMEND
THE ENERGY INDEPENDENCE PROGRAM REPORT AND
ADMINISTRATIVE GUIDELINES PREPARED PURSUANT TO
SECTION 589$.22 OF THE CALIFORNIA STREETS AND
HIGHWAYS CODE AND SETTING A PUBLIC HEARING THEREON
WHEREAS, pursuant to Chapter 29 of Part 3 of Division 7 of the California
Streets and Highways Code (the "Act"), the City Council established its Energy
Independence Program (the "Program" or "EIP") to assist property owners with the cost
of installing distributed generation renewable energy sources or making energy efficient
improvements that are permanently fixed to their property; and
WHEREAS, in connection with the Program and as required by the Act, the
Director of the City's Office of Energy Management prepared a report (the "Report") in
accordance with Section 5898.22 of the Act; and
WHEREAS, the Report contains (a) a map showing the boundaries of the
territory within which the Program is proposed to be offered, (b) a draft application for
participation in the Program, (c) a draft contract (the "Contract") specifying the terms
and conditions that would be agreed to by a property owner and the City for
participation in the Program, (d) a statement of City policies concerning contractual
assessments including: (1) identification of types of facilities, distributed generation
renewable energy sources, or energy efficiency improvements that may be financed
through the use of contractual assessments, (2) identification of a City official authorized
to enter into contractual assessments on behalf of the City, (3) a maximum aggregate
dollar amount of contractual assessments, (4) a method for setting requests from
property owners for financing through contractual assessments in priority order in the
event that requests appear likely to exceed the authorization amount, (e) a plan for
raising a capital amount required to pay for work performed pursuant to contractual
assessments, (f) a statement of or method for determining the interest rate and time
period during which contracting property owners would pay any assessment, (g) the
establishment of any reserve fund or funds, (h) the apportionment of all or any portion of
the costs incidental to financing, administration, and collection of the contractual
assessment program among the consenting property owners and the City, and (i) a
report on the results of the consultations with the County Auditor-Controller's office; and
WHEREAS, on August 28, 2008, the City Council approved the Report and
established the Program following a full and fair public hearing at which interested
persons were afforded the opportunity to object to, inquire about or provide evidence
with regard to the proposed Program or any of its particulars; and
WHEREAS, on June 25, 2009, the City Council approved amendments to the
Report following a full and fair public hearing at which interested persons were afforded
�
\�srv-fil2k3\groupsUda\Martin AlvarezlElPlReso12010-IntentionloamendElP8-26-10.DOC
RESOLUTION NO. 2010- 65
the opportunity to object to, inquire about or provide evidence with regard to the
proposed amendments to the Program or any of its particulars, including without
limitation amendments (i) to require documentation of consent by a preexisting lender for
any Program loan that is $30,000 or more, (ii) to establish $100,000 as the maximum
amount of any Program loan, and (iii} to require 50 percent of funds available for Program
loans to be reserved for energy efficiency upgrades and retrofits; and
WHEREAS, to facilitate the financial strategy of the Program by providing for
certain credit criteria and legal flexibility in order to secure third party financing for the EIP
on workable terms for the City, on January 14, 2010, the City Council approved
amendments to the Report following a full and fair public hearing at which interested
persons were afforded the opportunity to object to, inquire about or provide evidence
with regard to the proposed amendments to the Program or any of its particulars,
including without limitation amendments (i) to clarify the City's right of access to the
project, (ii) to clarify the City's right to inspect property owners' books and records, (iii) to
require certain annual certification from property owners, (iv) to require that property
owners maintain property insurance covering the EIP improvement and provide evidence
of such insurance prior to entering into the EIP Contract, (v) to require a minimum value-
to-lien ratio, and (vi) to require a nexus between the repayment term and the reasonably
expected useful life expectancy of the EIP improvements; and
WHEREAS, since July 2008 at least 22 states, with the first state being the State of
California, have adopted state legislation authorizing land-secured financing districts to
fund energy efficiency and renewable energy improvements on private property
(commonly known as "Property Assessed Clean Energy" (PACE)), and on May 7, 2010,
the U.S. Department of Energy released its "Guidelines for Pilot PACE Financing
Programs" (the "May 2010 DOE Guidelines") which provides best practice guidelines to
help implement the October 18, 2009, White House Policy Framework for PACE Financing
Programs; and
WHEREAS, although the formation and commencement of the Program have
preceded the issuance of the May 2010 DOE guidelines, the Program's practices and
underwriting guidelines are substantially compliant with the May 2010 DOE Guidelines and
in some instances exceed requirements of the May 2010 DOE Guidelines; and
WHEREAS, the Federal Housing Finance Agency (FHFA) is the federal regulatory
agency that oversees Fannie Mae (Federal National Mortgage Association) and Freddie
Mac (Federal Home Loan Mortgage Corporation), government sponsored enterprises that
purchase a large segment of single family home mortgages from lenders; and
WHEREAS, on July 6, 2010, the FHFA issued a guidance statement to Fannie Mae
and Freddie Mac (the "July 2010 FHFA Statement"), that (i} expresses its concerns that
the absence of robust underwriting standards to protect homeowners among priority lien
PACE programs across the nation raises mortgage safety and soundness concerns and
(ii) although allowing a waiver for homeowners who prior to July 6, 2010, obtained a
PACE-like loan (such as a loan under the Program), directs Fannie Mae and Freddie Mac
2
\lsrv-fil2k3\groupslyda\Martin Alvarez\EIP\Reso12010-IntentiontoamendElP8-26-10.DOC
RESOLUTION NO. 2010- 65
as of July 6, 2010, to tighten certain mortgage lending underwriting criteria and to enforce
the provisions of their Uniform Security Instruments prohibiting a property owner from
incurring a senior lien on the property (such as an assessment under the Program) without
the consent of the mortgage lender; and
WHEREAS, the July 2010 FHFA Statement does not adversely affect the superior
priority lien of assessments levied pursuant to the Act and the Program, which superior
priority lien has additionally been confirmed by a validating judgment issued by the
Superior Court of the State of California, County of Riverside, on May 21, 2010, and which
judgment on June 21, 2010, became final and non-appealable pursuant to California Code
of Civil Procedure Section 870; and
WHEREAS, the July 2010 FHFA Statement, however, places additional
accountability upon property owners participating in the Program with respect to the terms
of their mortgages, particularly the provisions that require a property owner to obtain
consent of the mortgage lender as to the terms of any lien that is senior to the lien of the
mortgage loan; and
WHEREAS, to provide additional protections to homeowners participating in the
Program, the City Council now desires to further amend the Report (i) to implement such
additional measures as are necessary for the Program to comply with all of the best
practices recommended in the May 2010 DOE Guidelines, (ii) to provide supplemental
disclosure to Program applicants as to the July 2010 FHFA Statement and the implications
thereof, and (iii) to make other changes that the City Manager determines are necessary
to achieve such additional protections, as set forth in the Report.
NOW THEREFORE, THE CITY COUNCIL OF THE CITY OF PALM DESERT
HEREBY FINDS, DETERMINES, RESOLVES, AND ORDERS AS FOLLOWS:
Section 1. The City Council hereby directs the Redevelopment Manager to
prepare and file at or before the time of the public hearing described in Section 2 hereof
with the City Council proposed amendments to the Report as described in the Recitals
hereto.
Section 2. The City Council hereby calls a public hearing to be held on
September 23, 2010 at 4:00 p.m., or as soon thereafter as feasible, in the Council
Chambers, 73-510 Fred Waring Drive, Palm Desert, California, on the proposed
amendments to the Report. At the public hearing all interested persons may appear and
hear and be heard and object to or inquire about the proposed amendments to the
Report.
Section 3. The City Clerk is hereby directed to provide notice of the public
hearing by publishing this Resolution once a week for two weeks, pursuant to Section
6066 of the California Government Cade, in The Desert Sun and the first publication
shall not occur later than 20 days before the date of such hearing.
3
\lsrv-fil2k3\groups4da\Martin AlvarezlElP\Reso12010-IntentiontoamendElP8-26-10.DOC
RESOLUTION NO. 2010- 65
PASSED, APPROVED and ADOPTED this 26t" day of August 2010, by the
following vote, to wit:
AYES:
NOES:
ABSENT:
ABSTAIN:
Cindy Finerty, Mayor
ATTEST:
Rachelle D. Klassen, City Clerk
4
\lsrv-fil2k3\groupsUda\MaAin Alvarez\EIP\Reso12010-IntentiontoamendElP8-26-t0.DOC
�'� Department of Energy
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Guidelines for Pilot PACE Financin� Pro�rams
May 7, 2010
This document provides best practice guidelines to help implement the Policy Framework for
PACE Financing Programs announced on October 18, 2009.1 Property Assessed Clean Energy
(PACE) financing programs allow state and local governments, where permitted by state law,to
extend the use of land-secured financing districts to fund energy efficiency and renewable
energy improvements on private property.Z PACE programs attach the obligation to repay the
cost of improvements to the property, not to the individual borrower. After consultation within
the federal government and with other stakeholders,the Department of Energy has prepared
the following Best Practices to help ensure prudent financing practices during the current pilot
PACE programs.
These best practice guidelines are significantly more rigorous than the underwriting standards
currently applied to land-secured financing districts. Especially in light of the exceptionally
challenging economic environment and recovering housing market,the follawing best practice
guidelines for pilot PACE financing programs are important to pravide an extra layer of
protection to both participants who voluntarily opt into PACE programs, and to lenders who
hold mortgages on properties with PACE tax liens.These best practice guidelines may evolve
over time as we learn more about the performance of PACE programs and are able to identify
new best practices.3 All pilot PACE financing programs are strongly encouraged to follow these
best practice guidelines. This document is divided into two sections: Program Design Best
Practice Guidelines and Assessment Underwriting Best Practice Guidelines.
1 The Policy framework for PACE financing Programs is available here:
htta://www.whitehouse.�ov/assets/documents/PACE Principles.pdf.
Z For more information on PACE programs,please visit:
http://wwwl.eere.energv.�ov/wip/solutioncenter/financialproducts/PACE.html. PACE programs are paid through
a tax lien on the property. Lien priority is a matter of state law,and these best practices do not(and cannot)pre-
empt state law.
3 These best practice guidelines are primarily for the residential market.Different standards may be appropriate in
non-residential markets.
1
Pro�ram Desi�n Best Practice Guidelines:
Local governments should consider the following program design features to increase the
reliability of energy and economic performance for the benefit of program participants,
mortgage holders, and investors.
1. Expected Savings-to-Investment Ratio(SIR)Greater Than One4
The primary rationale for PACE programs is to pursue a legally-defined "public purpose",which
generally includes environrnental, health, and energy independence benefits.s Although
traditional land-secured assessment districts do not require projects to "pay for themselves",
PACE financing should generally be limited to cost effective measures to protect both
participants and mortgage holders until PACE program impacts become more widely
understood.
The financed package of energy improvements should be designed to pay for itself over the life
of the assessment. This program attribute improves the participant's debt-to-income ratio,
increasing the participant's ability to repay PACE assessments and other debt, such as mortgage
payments. Local governments should consider three program design features to ensure that
the expected SIR is greater than one:6
• An energy audit and modeiing of expected savings to identify energy efficiency and
renewable energy property improvement measures that are likely to deliver energy and
dollar savings in excess of financed costs over the assessment term. Local governments
should limit investment to those identified measures.
4 SIR=[Estimated savings over the life of the assessment,discounted back to present value using an appropriate
discount rate]divided by[Amount financed through PACE assessment]
Savings are defined as the positive impacts of the energy improvements on participant cash flow. Savings can
include reduced utility bills as well as any payments for renewable energy credits or other quantifiable
environmental and health benefits that can be monetized. Savings should be calculated on an annual basis with an
• escalator for energy prices based either on the Energy Information Agency(EIA)U.S.forecast or a substantiated
local energy price escalator.
5 Specific public purposes are defined 6y the state's enabling legislation,which may vary somewhat between
states. Existing legislation is available here:
http://www.dsireusa.org/incentives/index.cfm?E E=1&RE=1&SPV=O&ST=O&searchtvpe=PTFAuth&sh=1
6 These program options are not mutually exclusive and programs should consider deploying them in concert. In
addition,these measures could be coordinated with the proposed HOMESTAR's Silver and Gold guidelines. More
Information on HOMESTAR is available here:
httq://www.whitehouse.�ov/the-press-office/fact-sheet-homestar-ener�v-efficiencv-retrofit-pro r�am
2
• In lieu of audits, programs may choose to limit eligibility to those measures with well-
documented energy and dollar savings for a given climate zone. There are a number of
energy efficiency and renewable energy investments that are most likely to yield a SIR of
greater than one for most properties in a region.
• Encourage energy efficiency before renewable energy improvements.The economics of
renewable energy investments can be enhanced when packaged with energy efficiency
measures, The SIR should be calculated for the entire package of investments, not
individual measures.
2.The Term of the Assessment Should Not Exceed the Useful Life of the Improvements
This best practice guidelines document is intended to ensure that a property owner's ability to
repay is enhanced throughout the life of the PACE assessment by the energy savings derived
from the improvements. It is important to note that the useful life of the measure often
exceeds the assessment term.
3. Mortgage Holder of Record Should Receive Notice When PACE Liens Are Placed
Mortgage holders should receive notice when residential property owners fund improvements
using a PACE assessment.'
4. PACE Lien Non-Acceleration Upon Property Owner Default
In states where non-acceleration of the lien is standard for other special assessments, it should
also be standard for PACE assessments.After a foreclosure,the successor owners are
responsible for future assessment payments. Non-acceleration is an important mortgage holder
protection because liability for the assessment in foreclosure is limited to any amount in arrears
at the time;the total outstanding assessed amount is not due in full.
5.The Assessment Should Be Appropriately Sized
PACE assessments should generally not exceed 109�0 of a property's estimated value(i.e. a
property value-to-lien ratio of 10:1). In addition, because of the administrative requirements of
administering PACE programs, assessments should generally not be issued for projects below a
minimum cost threshold of approximately$2500. These measures ensure that improvements
are "right-sized"for properties and for the administrative costs of piloting PACE programs.
PACE programs may also choose to set the maximum assessment relative to median home
values.
'A different standard may apply to non-residential properties.
3
6. Quality Assurance and Anti-Fraud Measures
Quality assurance and anti-fraud measures are essential protections for property owners,
mortgage holders, investors, and local governments. These measures should include:
� Only validly licensed auditors and contractors that adhere to PACE program terms and
conditions should be permitted to conduct PACE energy audits and retrofits. Where
feasible or necessary, auditors and contractors should have additional certifications
appropriate to the installed measures.
• Inspections should be completed on at least a portion of participating properties upon
project completion to ensure that contractors participating in the PACE program are
adequately performing work.
• If work is not satisfactorily completed,contractor payment should be withheld until
remedied. If not satisfactorily remedied, programs should disqualify contractors from
further PACE-related work.
• Property owners should sign-off before payment is issued for the work.
7. Rebates and Tax Credits
The total amount of PACE financing should be net of any expected direct cash rebates for the
energy efficiency or renewable energy improvements chosen. However, other non-direct cash
incentives can be more difficult to manage. For example, calculating an expected income tax
credit can be complicated, as not all participants wiil have access to the tax credit and there will
be time fags between project completion and tax credit monetization. Programs should
therefore consider alternative structures for financing this gap, including assignment of rebates
and tax credits to repay PACE assessments, short-term assessment additions, and partnering
with third party lenders that offer short-term bridge financing.At the minimum, programs
should provide full disclosure to participants on the implications and options available for
monetizing an income tax credit.
8. Participant Education
PACE may be an unfamiliar financing mechanism to program participants. As such, it is essential
that programs educate potential participants on how the PACE model works, whether it is a
property owner's most appropriate financing mechanism, and the opportunities and risks PACE
program participation creates for property owners. Programs should clearly explain and
provide disclosures of the following:
• How PACE financing works
4
• Basic information on other financing options available to property owners for financing
energy efficiency and renewable energy investments, and how PACE compares
• All program fees and how participants will pay for them
• Effective interest rate including all program fees, consistent with the Good Faith
Estimate (GFE) of the Rea) Estate Settlement Procedure Act (RESPA) and the early and
final disclosure of the Truth in Lending Act(TILA).
• PACE assessment impact on escrow payments (if applicable)
• Risk that assessment default may trigger foreclosure and property loss
• Information on transferring the assessment at time of sale
• Options for and implications of including tax credits in the financed amount
9. Debt Service Reserve Fund
For those PACE programs that seek third party investors, including investors in a municipal
bond to fund the program, an assessment reserve fund should be created to protect investors
from late payment or non-payment of PACE assessments.
10. Data Collection
Pilot programs should collect the data necessary to evaluate the efficacy of PACE programs.
Examples of typically collected data would include: installed measures, investment amount,
default and foreclosure data,expected savings, and actual energy use before and after
measures installation.To the extent possible, it's important that programs have access to
participant utility bills, ideally for 18 months before and after the improvements are made.The
Department of Energy will provide more detailed information on collecting this data,obtaining
permission to access utility bills, and how to report program information to enable a national
PACE performance evaluation.
Assessment Underwritin�Best Practices Guidelines:
Local governments should design underwriting criteria to reduce the risk of default and
impairment to the property's mortgage holders. Many best practices for reducing these risks
are included in the previous section. In addition, underwriting criteria for individual
assessments should include the following:
1. Property Ownership
• Check that applicant has clear title to property and that the property is located in the
financing district.
5
• Check the property title for restrictions such as details about power of attorney,
easements, or subordination agreements.
2. Property-Based Debt and Property Valuation
• 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. Local governments should be cautious about
piloting the PACE model in areas with large numbers of"underwater" mortgages.
� To avoid placing an additional tax lien on properties that are in distress, have recently
been in distress, or are at risk for distress,the following should be verified:
o There are no outstanding taxes or involuntary liens on the property in excess of
$1000(i.e. liens placed on property for failure of the owner to comply with a
payment obligation).
Property is not in foreclosure and there have been no recent mortgage or other
property-related debt defaults.
• Programs should attain estimated property value by reviewing assessed value. This is
typically used in assessment districts. If assessed value appears low or high, programs
should review comparable market data to determine the most appropriate valuation. If
programs believe the estimated value remains inaccurate or there is a lack sufficient
comparable market data to conduct an analysis,they should conduct a desktop
appraisal.8
3. Property Owner Ability to Pay
PACE programs attach the obligation to repay the cost of improvements to the property(not to
the individual borrower).The standard underwriting for other special assessments only consists
of examining assessed value to public debt, the total tax rate, and the property tax delinquency
rate. However, we deem certain precautions important due to the current vulnerability of
mortgage lenders and of the housing market in many regions. These precautions include:
• A Savings-to-Investment Ratio (SIR)greater than one, as described above, to maintain or
improve the property owner's debt-to-income ratio.
• Property owner is current on property taxes and has not been late more than once in
the past 3 years, or since the purchase of the house if less than three years.9
8 A desktop appraisal involves a licensed appraiser estimating the value of a property without a visual inspection.
These appraisals cost approximately$100.
9 Applicants that have purchased the property within 3 years have recently undergone rigorous credit analyses that
compensate for the short property tax payment history.
6
• Property owner has not filed for or declared bankruptcy for 7 years.
These best practice guidelines will evolve over time with continued monitoring of the
performance of pilot PACE financing programs.
7
FEDERAL HOUSING FINANCE AGENCY
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STATEMENT
_._.._____._. _ __.____ _.._.............._._._. __.---�-._ __ _
For Immediate Release COntact• Corinne Russell (202)4i4-692i
July 6, 2010 Stefanie Mullin (zo2)4i4-6376
FHFA Statement on Certain Energy
Retrofit Loan Programs
After careful review and over a year of working with federal and state government agencies,the
Federal Housing Finance Agency(FHFA)has determined that certain energy retrofit lending
programs present significant safety and soundness concerns that must be addressed by Fannie
Mae, Freddie Mac and the Federal Home Loan Banks. Specifically,programs denominated as
Property Assessed Clean Energy(PACE)seek to foster lending for retrofits of residential or
commercial properties through a county or city's tax assessment regime. Under most of these
programs, such loans acquire a priority lien over existing mortgages,though certain states have
chosen not to adopt such priority positions for their loans.
First liens established by PACE loans are unlike routine tax assessments and pose unusual and
difficult risk management challenges for lenders, servicers and mortgage securities investors.
The size and duration of PACE loans exceed typical local tax programs and do not have the
traditional community benefits associated with taxing initiatives.
FHFA urged state and local governments to reconsider these programs and continues to call for
a pause in such programs so concerns can be addressed. First liens for such loans represent a
key alteration of traditional mortgage lending practice. They present significant risk to lenders
and secondary market entities, may alter valuations for mortgage-backed securities and are not
essential for successful programs to spur energy conservation.
While the first lien position offered in most PACE programs minimizes credit risk for investors
funding the programs, it alters traditional lending priorities. Underwriting for PACE programs
results in collateral-based lending rather than lending based upon ability-to-pay, the absence of
Truth-in-Lending Act and other consumer protections, and uncertainty as to whether the home
improvements actually produce meaningful reductions in energy consumption.
Efforts are just underway to develop underwriting and consumer protection standards as well
as energy retrofit standards that are critical for homeowners and lenders to understand the
risks and rewards of any energy retrofit lending program. However,first liens that disrupt a
fragile housing finance market and long-standing lending priorities,the absence of robust
underwriting standards to protect homeowners and the lack of energy retrofit standards to
assist homeowners, appraisers, inspectors and lenders determine the value of retrofit products
combine to raise safety and soundness concerns.
On May 5, 2oio, Fannie Mae and Freddie Mac alerted their seller-servicers to gain an
understanding of whether there are existing or prospective PACE or PACE-like programs in
jurisdictions where they do business,to be aware that programs with first liens run contrary to
the Fannie Mae-Freddie Mac Uniform Security Instrument and that the Enterprises would
provide additional guidance should the programs move beyond the experimental stage. Those
lender letters remain in effect.
Today, FHFA is directing Fannie Mae, Freddie Mac and the Federal Home Loan Banks to
undertake the following prudential actions:
i. For any homeowner who obtained a PACE or PACE-like loan with a priority first lien
prior to this date, FHFA is directing Fannie Mae and Freddie Mac to waive
their Uniform Security Instrument prohibitions against such senior liens.
2. In addressing PACE programs with first liens, Fannie Mae and Freddie Mac should
undertake actions that protect their safe and sound operations. These include,but are
not limited to:
-Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan
amount available to borrowers in PACE jurisdictions;
-Ensuring that loan covenants require approval/consent for any PACE loan;
-Tightening borrower debt-to-income ratios to account for additional obligations
associated with possible future PACE loans;
-Ensuring that mortgages on properties in a jurisdiction offering PACE-like programs
satisfy all applicable federal and state lending regulations and guidance.
Fannie Mae and Freddie Mac should issue additional guidance as needed.
3. The Federal Home Loan Banks are directed to review their collateral policies in order to
assure that pledged collateral is not adversely affected by energy retrofit programs that
include first liens.
Nothing in this Statement affects the normal underwriting programs of the regulated entities or
their dealings with PACE programs that do not have a senior lien priority. Further, nothing in
these directions to the regulated entities affects in any way underwriting related to traditional
tax programs,but is focused solely on senior lien PACE lending initiatives.
FHFA recognizes that PACE and PACE-like programs pose additional lending challenges,but
also represent serious efforts to reduce energy consumption. FHFA remains committed to
working with federal, state, and local government agencies to develop and implement energy
retrofit lending programs with appropriate underwriting guidelines and consumer protection
standards. FHFA will also continue to encourage the establishment of energy efficiency
standards to support such programs.
###
The Federal Housing Finance Agency regulates Fannie Mae,Freddie Mac and the i2 Federal Home Loan Banks.
These gouernment-sponsored enterprises prouide more than$5.9 trillion in funding for the U.S.mortgage markets
and financial institutions.
FEDERAL HOUSING FINANCE AGENCY
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STATEMENT
For Immediate Release ContaCt: Corinne Russell (202)4i4-692i
July 6, 2oio Stefanie Mullin (202)414-6376
FHFA Statement on Certain Energy
Retrofit Loan Programs
After careful review and over a year of working with federal and state government agencies,the
Federal Housing Finance Agency(FHFA)has determined that certain energy retrofit lending
programs present significant safety and soundness concerns that must be addressed by Fannie
Mae, Freddie Mac and the Federal Home Loan Banks. Specifically,programs denominated as
Property Assessed Clean Energy(PACE)seek to foster lending for retrofits of residential or
commercial properties through a county or city's tax assessment regime. Under most of these
programs,such loans acquire a prioriry lien over existing mortgages,though certain states have
chosen not to adopt such priority positions for their loans.
First liens established by PACE loans are unlike routine tax assessments and pose unusual and
diffiicult risk management challenges for lenders,servicers and mortgage securities investors.
The size and duration of PACE loans exceed typical local tax programs and do not have the
traditional community benefits associated with t�ing initiatives.
FHFA urged state and local governments to reconsider these programs and continues to call for
a pause in such programs so concerns can be addressed. First liens for such loans represent a
key alteration of traditional mortgage lending practice. They present significant risk to lenders
and secondary market entities,may alter valuations for mortgage-backed securities and are not
essential for successful programs to spur energy conservation.
While the first lien position offered in most PACE programs minimizes credit risk for investors
funding the programs,it alters traditional lending priorities. Underwriting for PACE programs
results in collateral-based lending rather than lending based upon ability-to-pay,the absence of
Truth-in-Lending Act and other consumer protections, and uncertainty as to whether the home
improvements actually produce meaningful reductions in energy consumption.
Efforts are just underway to develop underwriting and consumer protection standards as well
as energy retrofit standards that are critical for homeowners and lenders to understand the
risks and rewards of any energy retrofit lending program. However,first liens that disrupt a
fragile housing finance market and long-standing lending priorities,the absence of robust
underwriting standards to protect homeowners and the lack of energy retrofit standards to
assist homeowners, appraisers,inspectors and lenders determine the value of retrofit products
combine to raise safery and soundness concerns.
On May 5, 2oio,Fannie Mae and Freddie Mac alerted their seller-servicers to gain an
understanding of whether there are existing or prospective PACE or PACE-like programs in
jurisdictions where they do business,to be aware that programs with first liens run contrary to
the Fannie Mae-Freddie Mac Uniform Security Instrument and that the Enterprises would
provide additional guidance should the programs move beyond the e�erimental stage. Those
lender letters remain in effect.
Today, FHFA is directing Fannie Mae, Freddie Mac and the Federal Home Loan Banks to
undertake the following prudential actions:
i. For any homeowner who obtained a PACE or PACE-like loan with a prioriry first lien
prior to this date, FHFA is directing Fannie Mae and Freddie Mac to waive
their Uniform Security Instrument prohibitions against such senior liens.
2. In addressing PACE programs with first liens,Fannie Mae and Freddie Mac should
undertake actions that protect their safe and sound operations. These include,but are
not limited to:
-Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan
amount available to borrowers in PACE jurisdictions;
-Ensuring that loan covenants require approval/consent for any PACE loan;
-Tightening borrower debt-to-income ratios to account for additional obligations
associated with possible future PACE loans;
-Ensuring that mortgages on properties in a jurisdiction offering PACE-like programs
satisfy all applicable federal and state lending regulations and guidance.
Fannie Mae and Freddie Mac should issue additional guidance as needed.
3. The Federal Home Loan Banks are directed to review their collateral policies in order to
assure that pledged collateral is not adversely affected by energy retrofit programs that
include first liens.
Nothing in this Statement affects the normal underwriting programs of the regulated entities or
their dealings with PACE programs that do not have a senior lien priority. Further,nothing in
these directions to the regulated entities affects in any way underwriting related to traditional
taY programs,but is focused solely on senior lien PACE lending initiatives.
FHFA recognizes that PACE and PACE-like programs pose additional lending challenges,but
also represent serious efforts to reduce energy consumption. FHFA remains committed to
working with federal,state,and local government agencies to develop and implement energy
retrofit lending programs with appropriate underwriting guidelines and consumer protection
standards. FHFA will also continue to encourage the establishment of energy eff'iciency
standards to support such programs.
###
The Federal Housing Finance Agency regulates Fannie Mae,Freddie Mac and the i2 Federal Home Loan Banks.
These gouernment-sponsored enterprises prouide more than$5.9 trillion in funding for the U.S.mortgage markets
and financial institutians.