Red Tape Can Kill Green Innovation

Fannie Mae and Freddie Mac are stifling creative ways to finance solar power for homeowners.

By Andrew Korfhage

Imagine putting solar panels on your roof for no money down. You partner with your city or municipality to cover the up-front cost of your new renewable energy system, which you pay back to the city as an add-on to your property taxes. You spread your payments out over 20 years and most likely the savings from your lowered electricity bill more than cover your higher property tax.

Not only do you become more self-sufficient in your energy generation, but also your city spurs development of new green-energy jobs. And everybody enjoys the benefits of shifting our society away from fossil fuels.

Sound like a good idea to you?

It did to the city council in Berkeley, California, which set up exactly such a pilot program to finance individual renewable energy systems and energy-efficiency retrofits in 2008. It has also sounded like a good idea to the 22 other states that have approved programs organized on this model for their local governments over the past two years. What's more, it sounded like a good idea to the White House, which set aside $150 million in stimulus money to help support such programs nationwide.

Widely known as PACE (property-assessed clean energy) programs, these innovative financing plans seemed ready to flourish  across the country until very recently. Then, in May, giant mortgage lenders Fannie Mae and Freddie Mac weighed in with a refusal to finance mortgages associated with a PACE lien, braking the PACE programs' momentum.

At issue is who gets paid first if a borrower defaults on a mortgage with a PACE lien attached to it. The way that PACE programs are structured, the lien gets paid first; Fannie and Freddie say the mortgage must be paid first, no exceptions.

What's most puzzling about the objections is that the PACE programs make good financial sense for homeowners. Solar energy systems and energy-efficiency retrofits pay for themselves over time, making borrowers more financially secure rather than less.

However, the size and leverage of these two agencies means that their refusal to participate has brought nationwide PACE programs to a standstill.

For example, Bay Area solar companies have postponed or downsized planned expansions due to business lost when Fannie and Freddie stepped in. "We lost almost a quarter of a million dollars' worth of projects overnight," Recurve retrofitting company president Matt Golden told The New York Times.

Though PACE programs are similar to thousands of other lien programs used by municipalities to fund infrastructure improvements, Fannie and Freddie stated in their letter of objection that PACE programs "do not have traditional community benefits associated with taxing initiatives."

Lawmakers and other elected officials disagree.

California Attorney General Jerry Brown filed a lawsuit on July 14 against Fannie Mae, Freddie Mac, the Federal Housing Finance Agency (FHFA), and other municipalities with now-struggling PACE programs have been threatening the same.

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

Similarly, the House and Senate have each proposed legislation that would prevent Fannie and Freddie from blocking local PACE initiatives.

"In many cases, the biggest barrier for homeowners and small businesses who want to make energy efficiency improvements is financing those projects," said Sen. Mark Begich (D-AK), a sponsor of the Senate bill. "This bill removes a bureaucratic roadblock and allows local communities to assist homeowners and businesses if they want to."

Resolving this conundrum shouldn't require a lawsuit or legislation. Fannie and Freddie promised "guidance" on the issue in their original letter of objection back in May. They should step forward with their solution now, so local communities can negotiate their differences with the giant lenders and get PACE programs back up and running sooner rather than later.