Fannie and Freddie Delinquent on Climate Change and Clean Energy
By Ethan N. Elkind, San Jose Mercury News
Mortgage insurers Fannie Mae and Freddie Mac have thrown a wrench into one of the most promising programs to finance climate change solutions and promote clean energy. The program, Property Assessed Clean Energy (PACE), helps homeowners pay for the upfront costs of environmentally friendly upgrades, from energy efficiency retrofits to solar panels.
Here's how it works: Municipal governments raise capital by issuing bonds and then use the proceeds to help fund the retrofits. Local governments then charge building owners an assessment on their property tax bills over a period of up to 20 years to cover the financing costs. The assessment is secured by a lien that remains attached to the property, even if the homeowner sells it. To qualify under federal guidelines, homeowners must be able to save more on their energy bills than the cost of the clean-energy improvements.
Now Fannie and Freddie have paralyzed PACE. The government-chartered mortgage finance giants, which underwrite three-quarters of all single-family-home mortgages, recently wrote a letter to lenders threatening to prohibit mortgages on properties with a PACE assessment. Why? Because in the event of a foreclosure, a property tax lien like PACE takes priority over the mortgage. So the local government gets repaid first on a PACE debt, and the bank gets the remainder. As mortgage insurers, Fannie and Freddie don't want to be on the hook for the loss.
This new policy is misguided, particularly given the program's popularity. PACE pilot programs in California have seen strong demand, with Sonoma County alone contracting for more than $30 million worth of projects, including $24 million for energy-efficient retrofits. California is now developing a statewide PACE program, and 23 states and the District of Columbia have enacted PACE legislation. Fifteen others may follow suit. The White House has prioritized widespread enactment of the program, dedicating more than $100 million in stimulus money to fund them.
Fannie and Freddie's letters have caused local governments throughout the country to suspend their PACE programs. Cities and counties don't want to jeopardize their residents' mortgages, while banks may be less willing to buy PACE bonds, and homeowners who have received PACE financing are concerned about their mortgage status.
But Fannie and Freddie's concerns are overblown.
First, mortgages are always junior to local government tax and assessment liens. Assessment districts have existed in the United States for more than a century, and PACE programs simply build on this existing authority by adding clean energy and energy efficiency to the types of improvements that assessments can finance.
Second, in the event of a foreclosure, the amount of money that local governments would collect on PACE assessments does not equal the total value of the clean energy financing, but rather the amount of delinquent assessment payments only — typically far less than $1,000.
Third, PACE programs have safeguards to prevent contracting with high-risk homeowners, following guidelines issued by the U.S. Department of Energy.
Finally, property improvements from PACE are likely to increase home values by reducing energy bills and improving comfort. Homeowners can point to a new solar hot water heater, extra insulation in the walls, sealed air ducts, and a rooftop solar array to add marketability.
Fannie and Freddie should continue to underwrite mortgages on properties with PACE assessments. They could insist on required safeguards, such as nonacceleration of the PACE assessment at the time of foreclosure and mandatory incorporation of the Energy Department's PACE guidelines. But they should not jeopardize the future of this promising program over concerns that can be readily addressed. To do otherwise would be to mortgage our economic and environmental future.
ETHAN N. ELKIND is the Climate Change Research Fellow at the UC Berkeley and UCLA schools of law and author of the report "Saving Energy: How California Can Launch a Statewide Retrofit Program for Existing Residences and Small Businesses." He wrote this article for this newspaper.