P.A.C.E. PROBLEM FOR NEW ENERGY

Green initiative's future murky as regulators weigh risks to homeowners
David S. Hilzenrath, July 4, 2010 (Washington Post)

"An Obama administration program to promote energy efficiency in homes appears to have met insurmountable resistance from financial regulators who are worried about its effect on residential mortgages, federal and local officials said…[and] the government has begun telling municipalities to think of other ways to use the millions in economic stimulus funds that had been set aside for the green initiative…

"The program is emblematic of President Obama's effort to build the economy by reducing reliance on fossil fuels. It provides loans for such improvements as solar panels or new windows, and then allows homeowners to repay the money over many years through surcharges on property tax bills."

What P.A.C.E. was to be. (click to enlarge)

"Under the program, known as Property Assessed Clean Energy, or PACE, the obligation to repay the loan stays with the home, transferring to a future owner if the home is sold. Because the PACE financing is a so-called "first lien" on the property, if the home lands in foreclosure, mortgage lenders take a backseat in pursuit of repayment…[It provides] business for home improvement contractors…[and] could spur the emergence of a new financial market in bonds backed by PACE loans. That could create fresh opportunities for Wall Street.

"Mortgage agencies Fannie Mae and Freddie Mac [dominate the market for home loans and] left the program's future in doubt in May when they sent lenders an alert noting that they do not take on mortgages that are subordinate to other loans…Federal financial regulators have since made clear that they, too, are uncomfortable with PACE liens that take first priority…[F]irst liens are [now] not expected to pass muster with financial regulators…[and the] Energy Department is seeking protection for homeowners who have already taken on PACE financing…"

What P.A.C.E. might have done. (click to enlarge)

"The Department of Energy has allotted something less than $150 million for those loans…[and it is] unclear how many of the loans have already been issued…The Federal Housing Finance Agency, which oversees Fannie and Freddie, last year said that such loans can expose homeowners to an array of risks, including home improvement scams…PACE loans were first introduced in 2008. The concept's champions include real estate and banking firms…

"Fannie and Freddie have been operating as wards of the government since they were brought low by the mortgage crisis. The companies pooled mortgages into securities and became behemoths before the bust, partly because those securities were widely seen as carrying the implied backing of the U.S. government. One lesson from the companies' costly implosion is that bond investors may not exert market discipline if they take for granted that securities will pay off."