More and more California cities are bringing back an innovative financing mechanism for home energy efficiency improvements and solar energy installations.

Property Assessed Clean Energy allows home and business owners to take out low-interest loans from the local government to pay for energy efficiency upgrades and distributed power generation, such as solar. Property owners repay the county or city through a line item on their property tax bills.

When the Federal Housing Finance Agency announced in 2010 that it didn’t like Property Assessed Clean Energy financing because the lien took precedent over a mortgage lien, Freddie Mac and Fannie Mae quit buying mortgages for homes that financed improvements or solar installations through PACE. That smothered the program in most cities and there have been very few residential PACE deals since.

Commercial PACE projects have continued, however, and in fact have gained significant momentum over the last year. In addition, a handful of cities never got rid of their residential PACE programs, which have continued to operate smoothly.

Now, dozens of California communities are preparing to restart their residential PACE programs, San Francisco being one of them, according to an article in SFGate.

Some residential PACE programs are popping up in different areas of the county, but no state is approaching the funding model with quite the same vigor California has.

California Governor Jerry Brown signed legislation in September that creates a $10 million reserve fund that will essentially act as a loan guarantee program for homeowners who use PACE financing.  In the event banks foreclose on any homes with PACE financed home improvements, the fund can cover Fannie Mae and Freddie Mac’s losses.  The fund eliminates some of the risk to lenders and makes it easier for homeowners to pursue the program.

National sentiment and the rebounding real estate market are also contributing to an overall feeling of optimism for PACE financing, according to the SFGate article.

Foreclosures have plummeted and the housing market is strong again, which reduces the risk to Fannie Mae and Freddie Mac. Additionally, the cost of solar panels has dropped more than 70 percent since 2007, making solar installations significantly more affordable now than they were when PACE financing was first introduced.  This, in turn, translates into smaller property liens.

Nationally, PACE has made its way back into discussions. No one was even bringing it up for a couple years.

If Mel Watt is appointed to lead the FHFA, something that’s increasingly likely to happen now that Democrats have changed the filibuster rules to prevent Republicans from blocking nominations, then PACE could be back on the board relatively quickly.

Industry leaders say they expect Watt will give PACE “a fresh look.”