The future hangs in the balance for the Property Assessed Clean Energy (PACE) program—one of the country’s most powerful financing mechanisms for residential energy-efficient improvements.

The 3-year-old PACE program allows residential and commercial property owners to take out loans from their local governments to finance solar systems and additional green retrofits and then repay the loans through an increase in property taxes over 20 years. The increase in property taxes is offset by the eventual decrease in energy bills. To date, 23 states (including Washington, D.C.) have passed PACE-enabling legislation, allowing the establishment of PACE programs at the local level in more than 200 communities.

But a recent announcement by the Federal Housing Finance Agency (FHFA) threatens the existence of the popular program. On July 6, the agency stated that it would not purchase mortgages linked to properties that have senior PACE liens, essentially nullifying the program for Fannie Mae and Freddie Mac borrowers.

According to the release, FHFA's stance is as follows:

... 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… 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.”

Members of Congress, government associations, and sustainability advocacy groups say that FHFA has got it all wrong and are urging the agency to restore the PACE program—what they say is an essential and irreplaceable vehicle for reducing energy consumption and greenhouse gas emissions as well as a job incubator, saving and creating thousands of jobs across the country.

“We think the FHFA is incredibly wrongheaded, narrow-minded, and that is being charitable,” says Martin Chavez, former mayor of Albuquerque, N.M., and executive director of the Boston-based ICLEI-Local Governments for Sustainability USA, a membership association of local governments committed to advancing climate protection and sustainable development. “Their concern is ill-founded. They are treating a property assessment as a loan, and it’s not. They’ve thrown into question all property assessment districts, including those that go to fund sewers and schools. So it’s a historic overreach by federal authorities into what is traditionally a local government arena.” (ICLEI and members of Congress called on the FHFA’s Acting Director Edward DeMarco to either work cooperatively with stakeholders and communities toward resolving PACE programs or step down.)

Despite the efforts by ICELI and others (including a letter sent on behalf of key Congressional members to President Obama), Chavez is not hopeful that the PACE program will be given a second chance.

“The program is dead, and it was just about to start spreading like wildfire,” Chavez says. “I am not optimistic that we are going to get a PACE fix in this [Congressional] session, which ends in the next week-and-half or two. We are a little bit mystified by the lack of Republican outrage in that this is a historic overreach by the federal government into a traditional local arena.”

If PACE is able to see the light of day again, the program’s continued impact will be sizable, adds Matt Ziskin, senior director of marketing for Kingston, N.Y.-based solar distributor and installer SunWize. “The real benefit of the PACE program is it enables people to get into solar without that huge outlay of capital upfront. That is typically the biggest barrier for most customers.” In California, for example, the average cost of a 5 kilowatt solar system (sans rebates) is $35,000; a multifamily property typically requires 2.5 to 3 kilowatts per unit, Ziskin explains.

“We haven’t really been able to see PACE yet in full force,” he says. “If it is well-funded and readily available to a lot of people, I think it will have a big impact on the industry and the adoption of solar.”