Energy & Environment

Clean Energy Programs Pit Advocates Against Mortgage Lenders

Clean energy advocates battle mortgage lenders over the validation of the ever-popular PACE programs.
by | September 2010

In the chaos of a collapsing housing market, a crumbling U.S. economy and an energy crisis, Cisco DeVries saw a perfect storm.

As chief of staff to Berkeley, Calif., Mayor Tom Bates, DeVries had been working on a project to put utility wires underground in a special assessment district. As agreed upon, the city would foot the upfront service, and homeowners would pay off costs over the next 20 to 30 years.

And that's when it hit him -- an idea so simple, it was scary: Why couldn't the city use the same model to reduce greenhouse gas emissions by helping residents generate renewable energy in their homes?

That fall in 2007, Berkeley set up the first such program, where homeowners could borrow money from the city for energy-efficient upgrades and pay it back through their property taxes, amortized over 20 years. Under the financing program, the debt would stay with the property even if it was sold.

"Not only does it help solve the funding problem of how we pay for renewable energy," DeVries says, "but it came along at exactly the right moment when we were focused on how we as a nation, as a state, can get people back to work and help families save money."

In the past few years, Property Assessed Clean Energy (PACE) programs -- based on the Berkeley First program -- have swept across the country at a speedy rate. So far, legislation and pilot programs have popped up in 22 states, from California, Texas and Florida to New York and the New England region. Some local governments also have created their own variations of PACE programs, such as Boulder County, Colo., which recently rolled out a version for commercial property owners -- about 25 businesses have applications in progress. Sonoma County, Calif., which boasts a program that predates the PACE phenomenon, has already financed more than 800 solar and other projects worth more than $30 million.

Seen as an innovative way to help homeowners retrofit homes with energy-efficient upgrades -- which can cost $30,000 or more before incentives -- the programs are intended to make it easier and cheaper for homeowners to reduce greenhouse gas emissions, generate renewable energy and ultimately, save money. So far, only a few thousand people have taken advantage of the program. But officials at all levels of government think the $150 million in stimulus funds allocated for energy efficiency programs like PACE will further encourage homeowners to install solar panels and other energy improvements.

"It's rare when something like that shows up and the solution presents itself in such a simple way that people can get it," DeVries says.

But not everyone gets it. In May, mortgage giants Fannie Mae and Freddie Mac sent out letters stating that PACE programs violate mortgage instruments by altering lien priorities and put homeowners in default of their mortgages. The Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, supported that stance and moved to block programs nationwide.

According to the FHFA, the size and duration of PACE loans exceed typical local tax programs and "pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors."

"Homeowners should not be placed at risk by programs that alter lien priorities and fail to operate with sound underwriting guidelines and consumer protections," said FHFA's Acting Director Edward J. DeMarco in a statement. "Mortgage holders should not be forced to absorb new credit risks after they have already purchased or guaranteed a mortgage."

With the housing market still reeling from its collapse and the recession, it makes sense that lending companies would try to protect mortgages at all costs, DeVries argues, but the move challenges the governments' rights to levy tax assessments for a public purpose. Local governments pay for municipal improvements such as sidewalks and sewer upgrades through tax assessments. Energy liens, local and state officials argue, are no different.

In any case, the actions by the FHFA have brought PACE programs to a grinding halt, hampering job creation and slowing energy independence momentum. Consider San Diego, which had a PACE program in the pipeline for this summer, but suffers from delays, which have left more than 100 people trained in energy retrofits without jobs.

As a whole, California has a lot to lose -- nearly half of its counties have developed or plan to start PACE programs. In addition to putting tens of thousands of clean energy jobs on the line, California is at risk of losing more than $100 million in federal stimulus funds available for such programs, according to gubernatorial candidate and California Attorney General Jerry Brown.

In July, Brown sued the mortgage giants and the federal agency that oversees them for disregarding state law, which classifies costs associated with PACE programs as tax assessments, not loans. In his lawsuit, he demanded that the mortgage lenders back off and let homeowners and businesses install upgrades to make their structures greener, reduce energy waste and shrink utility bills.

"Fannie Mae and Freddie Mac received enormous federal bailouts," Brown said in a release, "but now they're throwing up impermeable barriers to bank lending that creates jobs, stimulates the economy and boosts clean energy."

Supporters, which include the federal government, are also fighting back. In July, California Congressman Mike Thompson introduced the PACE Assessment Protection Act of 2010, which would order lenders to adopt PACE standards rather than stymie green energy efforts.

California Gov. Arnold Schwarzenegger, New York City Mayor Michael Bloomberg, the Obama administration and other officials are pressing the FHFA to revisit its position now that hundreds of millions of dollars in federal stimulus funding and hundreds of millions of dollars in state, local and private funding are in jeopardy. In the meantime, some programs, like the one in Sonoma County, are pushing ahead -- though they expect a drop-off in participation from both lenders and homeowners.


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