A Disappointing Development
July 7, 2010 3:08 PM
The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is urging both to avoid participating in the Property Assessed Clean Energy (PACE) program. PACE lets homeowners borrow money from their local governments to finance the high upfront costs of energy-efficient upgrades. Local governments raise the money through the sale municipal bonds, and the homeowner's debt is secured by a lien on the home that is paid off first, before mortgage debt, in case of a foreclosure or bankruptcy. This development is unfortunate because PACE helps both homeowners and lenders. To the extent that home energy costs are reduced, homeowners have more money remaining to pay their mortgage. That in turn reduces the likelihood that homeowners will default on their mortgage payments.
Nevertheless, the Federal Housing Finance Agency has a point. Sometimes hoped-for energy savings don't fully materialize. Unfortunately some energy saving investments, such as solar panels, return far less in energy savings per dollar of investment compared to other alternatives, such as adding insulation to older homes that have little or none. It is understandable that the FHFA would not want to subrogate its mortgages to other debts, when many of those energy saving alternatives will leave the homeowner with less money for their mortgage after they have paid their PACE special tax assessment.
Nevertheless, the Federal Housing Finance Agency has a point. Sometimes hoped-for energy savings don't fully materialize. Unfortunately some energy saving investments, such as solar panels, return far less in energy savings per dollar of investment compared to other alternatives, such as adding insulation to older homes that have little or none. It is understandable that the FHFA would not want to subrogate its mortgages to other debts, when many of those energy saving alternatives will leave the homeowner with less money for their mortgage after they have paid their PACE special tax assessment.
Nevertheless the PACE program is good for homeowners, the environment
and the country. Over time, reduced energy demand could help reduce
energy costs. We hope that Fannie and Freddie will work with the DOE and
the White House to find a workable compromise that would minimize the
impact on PACE programs that rely on the first-lien status. One
alternative might be to tie the PACE program to actual energy savings in
the home. For example, if the energy efficiency improvements actually
save the homeowner $50/ month as documented by pre and post improvement
records, the portion of the pace loan financed by that amount of savings
could be made senior to the mortgage. From Fannie and Freddie's
standpoint this would make the program neutral as far as increasing the
risk of mortgage default. Many types of cost efficient home energy
improvements would be totally covered by that rule. Others, such as
solar panels, might not be today, but the homeowners would still benefit
from federal tax credits for them (and in some cases state and/or local
tax incentives as well). Hopefully, with President Obama's
just-announced Department of Energy awards of nearly $2 billion in
conditional commitments from the Recovery Act to two solar companies,
the cost effectiveness of solar panels will also come down as the plants
produce millions of state of the art solar panels each year.
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