New Jersey households have among the highest rates of energy consumption and average household energy expenditure ($3,065 per year) in the country. So we have a big financial stake (in addition to our concerns about climate change) in the success of public efforts to help us weatherize our homes. In many cases, particularly in the case of older homes, investing in weatherization pays for itself[i] within 10 years (a better investment than long-run average stock return). The challenge is that the costs are upfront while the savings come in the future. Many people don’t have the have the financial flexibility to make the initial outlay (usually several thousand dollars) for home improvement or can’t obtain a low cost, long term loan that makes weatherization financially viable. Successful weatherization programs help homeowners overcome the upfront costs by issuing homeowners loans that have a repayment schedule with a monthly payment that is lower than the projected energy bill savings. Programs that facilitate weatherization also help the local economy by creating jobs and providing local residents with more purchasing power to support local businesses. The most successful residential weatherization programs are PACE programs (Property Assessed Clean Energy programs). Under PACE programs, local governments lend the money to pay for weatherization and the borrower repays the loan through a special assessment that is added to her property tax bill. Local governments may even do this with little or no cost to their budget by selling bonds to finance the loans and then using the proceeds of the special assessment revenue to service the bonds. PACE programs typically include a home energy audit and other consumer protections to ensure that the borrower will achieve enough energy cost savings to cover the property tax assessment—providing confidence both to the borrower and lender. Because PACE programs show such great promise, the Federal Housing Finance Authority (FHFA) disappointed many people when it recently announced that it would not modify a directive that has obstructed the operation of residential PACE programs across the country. But, New Jersey public officials and citizens cannot let this setback stand in the way of implementing other programs that can successfully promote residential energy efficiency projects in a self-sustaining manner.
PACE programs raised the concern of the FHFA because they effectively make the weatherization loan superior to the existing mortgage in any potential foreclosure process.[ii] For example, if a home with $5,000 left in delinquent weatherization debt were to be foreclosed, then that $5,000 might be repaid before the mortgage loan during a foreclosure (with variations depending on the details of the specific program). In 2011, the FHFA directed Fannie Mae and Freddie Mac to refrain from purchasing home loans where a PACE program lien is superior to the mortgage because those liens “raise safety and soundness concerns.” Simply put, PACE loans would decrease the value of loans purchased by Fannie Mae and Freddie Mac (which are both government-owned). Due to the important role of Fannie and Freddie in the home mortgage market and because most PACE programs make the special assessment superior to mortgage repayment, many local governments have ended or decreased their PACE activity. The FHFA had been scheduled to announce a final rule this September in which it could have articulated conditions under which the purchase of mortgages subject to PACE assessments would be permissible. But, late last month, the FHFA announced that it would not be issuing a new rule, though it would continue to consider alternatives.
It should be noted that the FHFA directive does not impact commercial mortgages. As such, PACE programs that finance commercial property energy efficiency improvements, solar power generation, and other clean energy projects are not affected. Additionally, local authorities, if authorized to do so under state law, may adjust their PACE programs to make them consistent with FHFA requirements. Vermont, for example, has passed a law making PACE special assessments subordinate to mortgages and any other liens created prior to the PACE assessments, thus addressing FHFA concerns. But, it makes sense to consider other financing options as well.
One potential alternative mechanism to PACE is On-Bill Repayment (OBR). OBR is similar conceptually to the PACE method, but loan repayment is made as a part of the utility bill instead of the property tax bill. Since local governments don’t generally issue utility bills, state legislatures or utility regulators may need to authorize or require utilities to enable the on-bill payment mechanism and to engage in lending. Utilities might also work with traditional lenders to provide financing and expertise on certain lending issues. Perhaps more importantly, legislation or regulations will need to be enacted that allow the transfer of OBR obligations when a new customer (who will benefit from lower energy bills and should receive disclosure beforehand) takes over an account (or the meter). The assurance that OBR obligations run with the utility bill should inspire lender and investor confidence that the loan will be repaid, and thus maximize the availability of financing and economies of scale.
In addition to not being impacted by the FHFA directive noted above, one advantage of OBR is that it will facilitate weatherization under scenarios where the individual who pays the property taxes is not the same as the person who pays the utility bill, i.e. rental property. In theory, it better aligns incentives and would be accessible to more property owners and energy users than PACE. Like PACE programs, a smart OBR program will require professional energy audits, consumer protections, and quality assurance. The disadvantage of OBR is that fewer states and localities have developed experience with OBR programs. But, last year the New York in cooperation with several utilities implemented an on-bill repayment program that enables residential customers of those utilities to finance weatherization projects through OBR. In New Jersey, New Jersey Natural Gas (NJNG) eligible customers may participate in the NJNG OBR program. New Jersey also offers Energystar Home Performance loans for weatherization to eligible participants. But, the program expires on June 30, 2014 or when funds are used up, whichever comes first. New Jersey leaders should establish new mechanisms to finance residential weatherization before then.
[i] Participants in the Weatherization Assistance Program administered by the U.S. Department of Energy achieved 35% reductions in their energy costs. http://www1.eere.energy.gov/library/pdfs/48098_weatherization_assisprog_fsr4.pdf
[ii] (either explicitly or, depending on the program, by virtue of property tax debts being considered superior to mortgage debt)