Oil is oozing onto Gulf Shore beaches at the height of vacation season. The Northeast just got slammed with record-high temperatures. Unemployment persists at unendurable levels. It seems like exactly the wrong time for the Obama administration to shut down a promising and increasingly popular way to make homes and other buildings more energy efficient -- a model with so much possibility that Vice President Joe Biden's Middle Class Task Force made it part of its "strategic plan for recovery through retrofit," and the Department of Energy granted more than $100 million to help implement it.
Last week, the Federal Housing Finance Agency dealt the strongest blow yet to property-assessed clean energy (PACE) loans, which cities and towns across the country have begun offering to help property owners caulk, insulate, efficiently heat, solar-panel, or otherwise modify their homes to reduce energy consumption. The FHFA, which is the conservator of the mortgage financers Fannie Mae and Freddie Mac, declared that PACE loans "present significant risk to lenders" and therefore to Fannie and Freddie. The Office of the Comptroller of the Currency, which regulates national banks, jumped in with its own warning to lenders as well as issuers and investors dealing in mortgage-backed securities: PACE poses a threat to the value of their holdings. The energy loans, OCC determined, raises "significant regulatory and safety and soundness concerns."
The regulators announced strict guidelines that force localities into a corner. Cities can continue to offer PACE, but then Fannie and Freddie must impose stricter lending standards on all local borrowers -- even those who never intend to take out PACE loans -- that will disqualify many applicants and properties that would otherwise be eligible for a mortgage. In effect, the new guidelines force mayors and city councils to choose between promoting energy efficiency and improving the health of their already battered real-estate markets.
Under that ultimatum, PACE's pioneers -- including San Francisco and Boulder -- have suspended their budding programs. In the 22 states that have given legislative authority to PACE so far, momentum has ground to a halt.
Much more than the states' enthusiasm is being squandered. A significant share of the $12 billion in Department of Energy stimulus funds for weatherization have been awarded to help states and cities launch retrofit programs in which PACE is a central pivotal feature, including at least $30 million to California, another $30 million each for Maine and Michigan, $40 million to New York, and $25 million to Boulder. Most of these grants were announced by Biden this past Earth Day. Just two weeks later, Fannie and Freddie issued letters telling lenders that PACE violates their contracts with the agencies.
At the heart of the dispute is a real and vexing problem. PACE borrowers pay their loans back over a period of years, through a surcharge on their local property taxes. The sensible idea is that the money they save through the energy efficiency more than pays for the debt owed, making funds available for them to meet their loan payments. While PACE has so far mostly been used for expensive solar-panel installations, many of the emerging PACE programs, including New York's, focus on retrofits, which cost as little as $5,000. That doesn't, however, guarantee that the funds will actually get paid back or even that the retrofits result in the expected energy or cost savings. Indeed, the potential for shoddy contractor work, with the bills handed to city tax collectors, looms large.
That makes Fannie and Freddie extremely nervous. As with other special tax assessments, PACE is "first lien," cutting in line to be paid before other creditors -- specifically, mortgage lenders. And that throws a fresh element of risk into an already shaky credit market, on top of declining home values. The Congressional Budget Office projects that the bailout of Fannie and Freddie will ultimately require $163 billion in infusions from the Treasury Department, putting them under strict orders from their regulator to plug every potential hole in their portfolio.
At the very moment that the Gulf spill gives the Obama administration a political opening to advance a new, national marketplace in energy-efficiency finance, the best vehicle it has to support that desperately needed project -- government-chartered, mission-driven financial institutions -- lacks the capital, political or otherwise, to play a constructive role.
PACE's supporters acknowledge that the model presents risks. One missing key ingredient is reliable data on the actual energy and cost savings that result from retrofits that could help lenders realistically evaluate their risks instead of assuming worst-case scenarios. But they also point out that the amount at risk to mortgage lenders on properties with a PACE loan is relatively small -- not much over $1,000, according to the Natural Resources Defense Council -- because borrowers are liable for just the amount past due, not the total cost of the home improvements. (Local governments, and the investors in bonds that they issue to bankroll PACE, are the players who have to reckon with much costlier risks. Not incidentally, the municipal-bond markets have yet to fully embrace PACE.)
But the disagreement is more fundamental than just who gets paid when. In its statement, the FHFA declared that PACE loans "are not essential for successful programs to spur energy conservation." That suggests a rift among those with the power to move the marketplace -- and within the Obama administration itself -- about how the nation should move forward to reduce energy consumption and greenhouse-gas emissions.
Fannie and Freddie themselves have fitfully backed "energy-efficiency mortgages" for a while now, which factor in future energy savings into the formula for qualifying for a home loan. But even when the agencies were among the wealthiest businesses on the planet and embraced profitable risk, they made these loans extremely cumbersome and expensive for consumers to use.
This month, the Treasury Department and the Department of Housing and Urban Development are seeking public comment on the future of the housing-finance system, to determine what comes after Fannie Mae and Freddie Mac. With long legacies of support for affordable housing and homeownership on the line, energy efficiency hasn't been part of that conversation so far. For the nation to find a way to finance millions of home retrofits -- and legions of "green jobs" that have yet to materialize -- that will have to change, and soon.
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