A plan that might sound like the work of those hooligans on Wall Street was in fact invented by an employee of the City of Berkeley in cooperation with Renewable Funding LLC, an Oakland-based corporation that helped to design, administer, and fund the Berkeley FIRST solar installation project.
Conceptually, it’s a simple business model: Issue loans to homeowners based on the value of their property, no deep credit check required. Combine those loans into pools and sell shares in those pools. The interest rates will be a bit high, so welcome borrowers who already have a lot of outstanding debt against their homes. Ensure that tax-payers are on the hook for these loans as much as possible. If you can, try to get some laws passed to ensure that, in the event of foreclosure, these loans are repaid first—even ahead of a primary mortgage on the property and even, if necessary, at taxpayer expense.
Berkeley FIRST was the nation’s first PACE program (PACE stands for Property Assessed Clean Energy). PACE programs are a way to finance clean energy. They are were invented in Berkeley by Mayor Bates’ then Chief of Staff, Francisco (Cisco) DeVries, reportedly with some help from Daniel Kammen of UC Berkeley. DeVries later resigned his position with the city to help start Renewable Funding LLC, a privately held company, along with Kammen and Stephen Compagni Portis (a venture capitalist and also a colleague of Kammen’s at UCB).
Although PACE started with a small pilot program in Berkeley, it rapidly spread around the state and the nation. Today, twenty-one states plus the District of Columbia have PACE programs. This rapid growth, spurred in part by concerns for the environment and in part by efforts to create jobs, happened in roughly two years. Renewable Funding LLC rode the wave, participating in PACE program design, administration and funding in many municipalities. The company recently received venture capital funding of $12.2 million dollars.
Proponents argue that PACE is a clever way to fund essential clean energy improvements to vast numbers of US households and commercial buildings. But problems have arisen, stemming from the financial structure of PACE: PACE programs have been suspended around the country in response to objections raised by mortgage giants Fannie Mae and Freddie Mac.
PACE Put on Hold
PACE programs seek to encourage clean energy and energy efficiency improvements in homes and commercial structures by helping property owners to finance the upfront costs. For example, the Berkeley FIRST program enabled 13 homeowners to install solar power systems, using money from bonds issued by the City. In exchange, owners of participating homes agreed to an increase in their property taxes to repay the bonds. The idea is that this funding method is revenue-neutral for the city, but helps to decrease the city’s overall “carbon footprint” and reliance on imported energy.
However, mortgage holders, particularly Fannie Mae and Freddie Mac, object to the use of PACE programs by their borrowers. The increased taxes PACE imposes on a property take the form of a lien with seniority over the mortgage. In the event of a foreclosure, PACE taxes must be paid before mortgage lenders are paid.
A July 6 letter from the Federal Housing Finance Agency (FHFA) further asserts that PACE programs do not evaluate the borrowers who wish to receive these funds carefully enough, and that the programs are not supported by any evidence that they increase property values or achieve the intended clean energy benefits.
The FHFA says that PACE programs benefit the investors (those who buy the bonds) but place mortgage holders at risk:
“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.”The objections raised by FHFA have caused the suspension of nearly all PACE programs across the country. Twenty one states (including California) and the District of Columbia are affected.
Profit for Inventors, Trouble for Mortgages
PACE programs are frequently described as the joint invention of DeVries, now President of Renewable Funding, and Kammen, then and still Director of the Renewable and Appropriate Energy Laboratory (RAEL) at the University of California, Berkeley. With Stephen Compagni Portis, a venture capitalist and visiting scholar at UC Berkeley and member of the RAEL lab, they founded Renewable Funding, LLC. Compagni Portis is now the company’s chairman.
According to the company’s web site, Renewable Funding offers “a turnkey solution specifically engineered to support the development of property-assessed clean energy (PACE) financing districts.” It helps municipalities to draft legislation and design programs, assists in marketing and administering PACE programs, and helps to secure financing—sometimes including buying up the bonds. In Berkeley, Renewable Funding bought up approximately $1.5 million worth of the bonds it had helped to design.
Renewable Funding collected fees and taxpayer-secured bond interest associated with these programs during a period when the foreclosure crisis began to rear its ugly head. As mortgage holders were suffering, PACE programs piled on with senior liens and taxpayer guarantees.
The PACE Timeline
May 23, 2006: Mayor Tom Bates places an item on Council’s Action Counter, seeking a ballot measure initially drafted to say “Should the People of the City Berkeley advise the Berkeley City Council to adopt and support aggressive efforts to reduce greenhouse gas emissions and actively engage in climate-disaster preparations to address the likely local climate change impacts such as flooding, shortages of potable water, and dramatically increased costs of energy?”
With some changes, this would eventually become Measure G, reading (on the ballot): “Should the People of the City of Berkeley have a goal of 80% reduction in greenhouse gas emissions by 2050 and advise the Mayor to work with the community to develop a plan for Council adoption in 2007, which sets a ten year emissions reduction target and identifies actions by the City and residents to achieve both the ten year target and the ultimate goal of 80% emissions reduction?”
November 7, 2006: Measure G passes overwhelmingly.
November 9, 2006: : At a celebration and kick-off for measure G, Mayor Bates announces Sustainable Berkeley’s Greenhouse Gas Initiative, “that came out of a 2 year dialog with business leaders,” according to a City press release.
Dan Kammen of UC Berkeley is scheduled to “invigorate the evening with his thoughts on how Berkeley can meet the Measure G mandate.”
Sometime in 2007: Cisco DeVries and Daniel Kammen are reported to have invented the PACE program.
January 30, 2007: Mayor Bates seeks and receives council consent to tentatively reserve $100,000 in the next budget to fund Measure G work.
In his memo placing this consent item on the agenda, Bates remarks: “I am reorganizing my office to focus more effort on our greenhouse gas reduction efforts. Beginning February 1st, my chief of staff Cisco DeVries will work half time on green house gas reduction efforts for the remainder of 2007. Some of his duties will be transferred to other staff.”
February 22, 2007: Termed-out lame-duck Assemblyman Lloyd Levine introduces Assembly Bill 811, which gives necessary state-level authorization to PACE programs. AB 811 is sponsored by the city of Palm Desert, California, which goes on to become a flagship client of Renewable Funding.
October 30, 2007: The Berkeley Daily Planet reports that the proposed PACE program in Berkeley is expected to add 125 new installations (it eventually adds 13). The city applies for a $160,000 grant from the EPA to create the program indicating that Daniel Kammen and Steven Chu (now Secretary of Energy) will serve among the advisors to the project.
Sometime in 2008: Renewable Funding LLC is founded by Compagni Portis, soon joined by DeVries, reportedly with Kammen’s participation.
February 13, 2008: Cisco DeVries’ resignation as Mayor Bates’ Chief of Staff is announced after two months of prior “transitioning” activity. In his remaining three weeks on the job, he will work exclusively on Berkeley’s solar PACE program.
June 21, 2008: AB 811 is signed into law by Governor Schwarzenegger.
September 16, 2008: Berkeley City Council approves the PACE program known as Berkeley FIRST. The New York Times quotes Daniel Kammen, in response to concerns about troubled financial markets, “Mr. Kammen, the Berkeley professor, was not worried, pointing out that venture capitalists have been pouring billions of dollars into the development of alternative-energy technology and looking for new ways to finance potential breakthroughs. ‘There’s so much more money there than ideas,’ he said. “
September 23, 2008: Berkeley City Manager Phil Kamlarz places an item on the Council’s action calendar to approve the contracts with Renewable Funding. This measure puts Berkeley taxpayers on the hook for a theoretical maximum of $1.5M but only requires a $97,500 set aside. It is expected that, in the case of Berkeley’s pilot program, none of this taxpayer money will need to be spent.
October 23, 2008: Renewable Funding announces that registrations for Berkeley FIRST will open on their web site on November 5th, just one month after the contract is formally approve
November 5, 2008: Applications swamp the Berkeley FIRST program and all available slots are filled within 9 minutes of opening. Most applicants at this stage will ultimately choose to not enter the program, many citing the unfavorable interest rate and repayment terms of the bonds. Thirteen applicants, most with large first and second mortgages on their house already, remain.
Sometime in 2009: Renewable Funding purchases $1.5 million of bonds from Berkeley and, meanwhile, expands into many other cities. They become the “go to” firm which helps municipalities design, implement, execute and finance PACE programs.
June 18, 2009: FHFA issues the first warning letter that PACE programs create undue risks to homeowners and to lenders, according to a recent report from Lawrence Berkeley Laboratory.
October 13, 2009: The Boulder County CO Board of Commissioners writes to FHFA defending certain aspects of their PACE program. Notably, Boulder County’s loans (unlike Berkeley’s) require “acceleration” (full and immediate repayment) in the event of a default on the property. Boulder County points out that they were advised that, otherwise, the bonds they issued would be unattractive to the market and the program not viable. Boulder County’s PACE program was designed in consultation with Renewable Funding, which cites the county as a featured client.
October 29, 2009: Renewable Funding announces closing a deal to receive $12.2 million in venture capital funding.
July, 2010: After a year of discussion with Congress, the White House and other stakeholders, the FHFA, Freddie Mac and Fannie Mae pull the plug and force the suspension of PACE programs. Cisco DeVries remarks to the New York Times: “For all intents and purposes, until cooler heads prevail or congress acts, it’s very difficult to envision PACE going forward.”
A Saner PACE Possible?
PACE programs as currently implemented have tended to extend credit at less favorable terms than are often available from private sources for credit-worthy borrowers. This is not to say, at all, that PACE borrowers are anticipated to be deadbeats: merely that Freddie Mac and Fannie Mae are not completely out to lunch in raising their concerns.
Fixes to the PACE scheme might take the form of a court challenge to Freddie and Fannie’s objections, or the form of new federal legislation, or, as the state of Maine is considering (according to a March 25 online article from the Wall Street Journal) by making PACE loans junior rather than senior to existing mortgages.
Creative financing for domestic clean energy improvements appears to be excellent social policy yielding both environmental and economic benefits. What remains to be seen is if it can be done in a less problematic way.
Renewable Funding LLC could not be reached in time to comment for this article. We hope to talk to them later for a follow-up report.