The financial geniuses at Fannie Mae and Freddie Mac who managed to lose billions of dollars in the housing market have decided in their new-found fiscal conservatism to do their best to derail a promising and innovative mechanism for financing local green energy retrofits. The federal housing agencies' attack on an energy and money-saving program, Property Assessed Clean Energy (PACE), demonstrates an obtuse hostility toward green energy initiatives.
Property Assessed Clean Energy programs allow local governments to sell municipal bonds and lend the capital to local homeowners for energy efficiency and renewable energy projects. This solves two problems that usually stop homeowners from retrofitting older homes for green energy: 1. The availability of capital, and; 2. The possibility that the time it takes to recoup the energy cost savings from your investment could be longer than the amount of time that you own your home. PACE programs add the green energy loan repayment to a homeowner's property tax bill, so the costs of energy-saving investments are assumed by new homeowners if the house is sold. After 10-20 years, the additional assessment ends once the loan is repaid. The PACE program provides a great incentive for homeowners to switch to renewable energy or reduce their energy consumption.
Unfortunately, federal financial institutions object to the PACE program. In an article written this past March, the Wall Street Journal's Nick Timiraos outlined the financial dilemma posed by this new mechanism when he noted that PACE:
"...debt would be senior to existing mortgage debt, so if the homeowner defaults or goes into foreclosure, it would be repaid before the mortgage lender gets any money. While property-tax assessments are usually senior to existing property debt, cities have traditionally used their assessment authority for community-wide improvements like sewers and roads--not for upgrades that homeowners elect to make on their own homes. Proponents of the program, called Property Assessed Clean Energy, or PACE, say it is necessary for the loans to be paid before mortgages if local governments are to raise funds for the program from municipal-bond investors."
At the heart of these financial institutions' objections to PACE is a shortsighted and narrow view of the world that willfully ignores the value of reducing the cost of energy in the home. Rather than working with state and local governments to ensure that PACE investments add value to the home in ways that address potential financial objections, these financial wizards simply say they will not buy or sell mortgages that include PACE-related liens. In a New York Times article on June 30, Todd Woody reported that:
"In letters sent to mortgage lenders on May 5, Fannie Mae and Freddie Mac stated that energy-efficiency liens could not take priority over a mortgage. 'The purpose of this industry letter is to remind seller/servicers that an energy-related lien may not be senior to any mortgage delivered to Freddie Mac,' wrote Patricia J. McClung, a Freddie Mac executive. However, the agencies did not offer guidance to mortgage lenders on how to handle properties that carry the energy liens. Backers of the programs fear that mortgage lenders, who depend on Fannie and Freddie to buy their home loans, will now start demanding that the entire lien be paid off before issuing a new loan."
It is true that many mortgages are in trouble because homeowners have taken out too much debt on their homes and have borrowed and spent their housing equity on frivolous purchases like big screen TVs and hot tubs. However, a more efficient furnace, insulation and solar panels are investments that increase in value as the price of energy rises. PACE programs can be designed to require certified energy audits, higher levels of financial capability and other restrictions. These lumbering financial giants should not be allowed to destroy this promising local initiative.
But nobody is stopping them. In a statement issued on July 6, the Federal Housing Finance Agency exempted homes with existing PACE loans from proposed restrictions but directed Fannie and Freddie to:
"Undertake actions that protect their safe and sound operations. These include, but are not limited to:
- Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers in PACE jurisdictions;
- Ensuring that loan covenants require approval/consent for any PACE loan;
- Tightening borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans..."
The Federal Housing Finance Agency also encourages Fannie and Freddie to develop additional guidelines for these green energy finance programs. While this new approach is far better than automatic rejection, it may be a way of replacing the initial sledgehammer elimination of PACE with death by a thousand small cuts.
What is most disturbing about the approach taken by these federal housing agencies is their obvious hostility to the goals of green energy. While they provide lip service in support of green energy goals, their actions speak louder than their words. As of today, 22 states have authorized PACE programs, but these are fledgling efforts at best. At this crucial early stage and in the very complex world of home finance, housing agencies have done what I am afraid may be permanent damage to a promising initiative. If PACE is to be saved, the Obama Administration needs to send a clear message to all federal agencies, including those bailed-out, quasi-private bodies like Fannie and Freddie, to get on the green energy train. Today.