Exclusive: Fannie Regulator Digs in on Clean-Energy Opposition

| Mon Aug. 30, 2010 6:29 PM EDT

The Federal Housing Finance Agency solidified its opposition to the home-greening program Property Assessed Clean Energy (PACE) in a letter to members of Congress Thursday, telling them it doesn't see a way to let the program move forward.

FHFA Acting Director Edward DeMarco rejected the possibility of a PACE pilot program, seen as the last best hope for bringing the suspended finance tool back to life in the near term.

"Discussions have failed to produce concepts that would mitigate the threat to FHFA-regulated institutions or to broader financial markets," DeMarco wrote to PACE-supporting Reps. Ed Perlmutter (D-Colo.), Steve Israel (D-N.Y.), John Sarbanes (D-Md.), and Mike Thompson (D-Calif.). "FHFA, therefore, has determined that its guidance to its regulated entities must remain in place."

The remaining options for saving the popular PACE program are a court battle, legislation, or possibly intervention from the Obama administration. That last option seems remote since the administration has so far refused to put its top people on the case.

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Here's the background (borrowed from Grist's previous coverage): PACE works by letting homeowners pay for rooftop solar arrays and energy-saving retrofits through a surcharge on their property tax bills. The cost is paid back over 10 to 20 years. In this way PACE removes high upfront costs and ensures that property owners don't lose out if it they sell—the new buyer inherits both the home improvements and the tax assessment. The Berkeley-born model creates work for building contractors, cuts carbon pollution, and essentially runs on private capital, since cities and towns that offer PACE fund it through municipal bonds.

Until late spring, PACE was spreading at a steady clip: Twenty-two states had endorsed the model and encouraged municipalities to set up programs. San Francisco had just launched a program and Los Angeles was preparing for one later in the year. The Obama administration backed the model with $150 million in stimulus it funding and an endorsement from the vice president's Middle Class Task Force.

But in May FHFA threw the nation's first programs into confusion by warning lenders to stay away from properties with PACE assessments. The agency objects to the liens that PACE puts on properties, which get paid off ahead of mortgages if a borrower defaults. That adds a theoretical risk into an already jittery credit market.

It's an unfounded fear, since well-designed energy retrofits add to a homeowner's financial security, cutting their utility bills and making them a safer bet for lenders. A report commissioned by a major financial institution last year found that energy-efficient homes had default and delinquency rates 11 percent lower than typical homes. PACE advocates have worked to integrate standards to ensure the quality of retrofits, but that work can't continue with programs stalled out.

DeMarco raised the question of quality standards in his letter [PDF] this week:

No satisfactory conclusion has been reached to address problems associated with liens created after a mortgage is in place, thereby transferring credit risk to banks, secondary market parties and investors in mortgage-backed securities. Further, consumer protections and appropriate underwriting standards need to be uniform and mandatory to protect homeowners.

... I believe that FHFA has done its utmost to seek constructive alternatives.

PACE advocates in the building trades, local governments, and Congress disagree with his "utmost" assertion.

"Every single issue raised by FHFA was raised previously and resolved, from almost everybody's perspective, with excellent answers," PACE creator Cisco DeVries told Grist last month. "It's clear they didn't want to take 'yes' for an answer."

The chances of a legislative fix this year are slim, given the level of dysfunction in the Senate. Majority Leader Harry Reid said he'd consider pushing a PACE bill if it got a Republican cosponsor, but that hasn't happened yet. In the House, Bob Inglis (R-S.C.) signed on as the first Republican cosponsor of a PACE bill earlier this month.

That raises the question of where the other Republican supporters are, according to Cliff Staton, vice president of marketing at DeVries's company Renewable Funding, which helps towns and counties set up PACE programs.

"PACE has not been a partisan issue at the state and local level," Staton wrote in an email. "... But in DC, everything seems to be partisan.

"Now that one Republican has crossed the line, though, the question for other Republicans becomes: 'Why not co-sponsor?'"

PACE isn't the only innovative financing tool for making green improvement affordable for homeowners. But it has been one of the most effective ones during its three-year life. Now supporters know a little more about their options for saving it.

This post was produced by Grist as part of the Climate Desk collaboration.