When the county’s ClimateSmart loan program was suspended last year, it left hundreds of local homeowners holding the bag — a bag they now need to fill with money.
The program allowed property owners to get low-interest loans for energy-related improvements with little or no money down.
But federal regulators pulled the plug on the program last summer, saying the financing was too risky. So now property owners must pay off those loans when the property is sold — or even refinanced, if they have enough equity.
However, there may be an end in sight.
There are efforts under way from the county level to the federal level to restore funding for ClimateSmart and similar programs around the country.
Some speculate that politics surrounding the debate over climate change and global warming may have had something to do with the decision to yank funding from the energy program, but those close to the negotiations say it was simply a question of federal regulators having a low tolerance for any perceived risk, fresh off the near-collapse of the country’s banking industry.
TOO GOOD TO BE TRUE
In 2009, Boulder County latched onto a stellar idea that was beneficial for homeowners’ pockets, the environment and maybe even banks. It was an idea that got its start in two California cities, an idea in which homeowners could take out an additional loan on their homes to fund energy-efficient and renewable-energy upgrades like insulation and solar panels. The loan was a first lien, meaning it had priority over the regular mortgage and repayments were made along with property taxes. Even more important, it traveled with the property, not with the holder of the loan. It allowed cash-strapped homeowners to get a loan for attractive terms and save on their energy bills, all while reducing greenhouse gases. It seemed too good to be true, and maybe it was.
It all changed on June 29, 2010, when the county had to cancel its third round of residential financing due to a mandate from federal banking regulators that essentially precluded such loans from being funded due to concerns that they were too risky. Almost $9.8 million had already been issued to 632 people, who on average received about $15,500 for their improvements. As of March 11, only 33 of the 632 assessments — $454,164 of that $9.8 million — had been paid off.
Teresa Foster of Longmont is one of those hundreds of people in the county who still hold a loan under ClimateSmart. Now, as she goes to sell her home, she has realized that instead of passing that loan on to the next property owner, the loan is going to have to come out of her pocket when she sells her house.
The county commissioners sent a letter to ClimateSmart participants last September notifying them that, due to the plug being pulled by the feds, they must pay off those loans for any new mortgage to be eligible for sale to Fannie Mae and Freddy Mac, which is where most mortgages end up. The letter also notified participants that if they refinance their mortgage and they have sufficient equity, the ClimateSmart loan must be paid off at that time. If there is not enough equity to cover the loan payoff, the refinance can be carried on to the loan still attached to the property, the letter said.
In the case of Foster, who has paid off her home, it’s going to mean she has to take $27,000 off the top when she sells it.
“All of us are going to be shit out of luck,” she told Boulder Weekly. “The bottom line is that a program that was set up by the county to give us renewable energy and make a dent in greenhouse gas emissions and also reduce demand has turned out to screw us. … Now I’m finding the hand that fed me is going to bite me.”
County officials began to get warning bells about the program in September 2009, when Fannie Mae issued a “lender letter” acknowledging that it was reviewing its underwriting guidelines to “determine appropriate requirements” in areas that had enacted Property Assessed Clean Energy (PACE) programs like ClimateSmart.
The other shoe dropped in May 2010, when an additional lender letter from Fannie Mae and Freddie Mac indicated that mortgages with senior liens like PACE loans are prohibited.
By July 2010, the Federal Housing Finance Agency (FHFA), the entity created to regulate Fannie and Freddie two years earlier amid the banking crisis, issued what those in the industry call “the execution letter,” which in no uncertain terms ruled out PACE loans, saying they “are unlike routine tax assessments and pose unusual and difficult risk management challenges” and “present significant risk.” The letter says “first liens that disrupt a fragile housing finance market and longstanding lending priorities, the absence of robust underwriting standards to protect homeowners, and the lack of energy retrofit standards to assist homeowners, appraisers, inspectors and lenders determine the value of retrofit projects combine to raise safety and soundness concerns.”
For their part, the county commissioners have been sympathetic to participants’ concerns.
“I would be upset too,” Commissioner Ben Pearlman told Boulder Weekly. “If we had any idea that the FHFA was going to pull the rug out from under us, we wouldn’t have designed the program the way we did. I share their frustration, and I wish we weren’t in the situation we’re in. … These are the kinds of investments we have to make as a society if we’re going to get any kind of chance of energy independence and addressing climate change.”
But he points out that the energy-related improvements have increased the value of those homes and lowered energy costs.
“Those are tangible improvements, and the fact that the lending industry doesn’t recognize that at all is unimaginable and, I think, myopic,” Pearlman says. “Heck, everybody should be doing this, but not everybody has the money up front, and there was that question of how long you’re going to be in your house. So this program really was designed to crack that nut, to make it possible for lots of people to do this. And then we get this letter.”
Pearlman says it’s curious that the FHFA took this stance when there are scores of other special improvement districts that have been formed using the same financing structure. And he says it has always been the prerogative of local governments to determine what types of “public purpose” or “community benefit” warrant such special assessments, be they roads, sidewalks or energy savings.
“That, to me, is beyond the pale, as if energy were not one of the fundamental things we should be addressing as a collection of communities,” Pearlman says. “For decades and decades, local governments and state governments have had the ability to determine what were the appropriate circumstances for public benefit.”
Commissioner Will Toor agrees. “It’s an unprecedented and significant attack on state and local decision-making,” he says, noting that the Colorado legislature had passed a bill authorizing ClimateSmart. “You’re in violation of 75 years of precedent. You’ve got a federal agency asserting that they get to decide what’s a valid public purpose for improvement districts, rather than state legislators getting to decide.”
“This is not a new financing mechanism,” adds David Gabrielson, the executive director of PACENow, a national organization advocating for PACE programs. “Nobody put the FHFA on this earth to be the arbiters of public purpose.”
Toor says the type of financing offered through ClimateSmart is actually less of a risk for lenders than other types of assessments, like those issued for improvements associated with new, sprawling housing developments that could very well be a bust.
He sympathizes with ClimateSmart participants who are saddled with extra debt, but he points out that since the improvements increased the value of their properties, they should be able to increase the asking price for their homes. Those who may feel the pinch most are those who want to refinance to take out some of their equity, because they’ll have to use some of that equity to pay off the extra loan first.
But help for current and future ClimateSmart participants may be imminent.
Toor says county officials are hoping to launch a similar program on a smaller scale later this spring, and are in negotiations with two financial institutions to do just that. Using a portion of a $25 million grant received from the U.S. Department of Energy last May, he says, the county plans to create a “loan loss reserve fund” that will be used to back loans for energy-related improvements for borrowers with a wider range of credit scores — and at lower interest rates — than the banks would consider otherwise, because they will have this security fund worth between 10 percent and 20 percent of the total loan pool to fall back on in case of defaults.
Initially, Toor says, the loans will be up to $3,000 for residents, but plans call for increasing that amount and expanding it to small businesses as well.
Toor also describes two other efforts under way at the national level that could revive PACE programs like ClimateSmart.
One involves litigation; the other involves legislation.
Several lawsuits have been filed nationally against the feds who killed PACE programs. The most prominent — and furthest along — was filed by former California Gov. Arnold Schwarzenegger and then-California Attorney General Jerry Brown, who is now that state’s governor.
Toor says he was encouraged by a judge’s recent ruling in that case, a ruling that seemed to acknowledge the plaintiffs’ claim that the FHFA did not follow proper procedures before issuing its ban on PACE-affiliated mortgages.
On Dec. 20, U.S. District Court Judge Claudia Wilken declined to grant the plaintiffs’ motion for a preliminary injunction that would have reinstated PACE programs, but she encouraged them to submit a narrower request — one asking that “the defendants proceed to initiate the notice and comment process while this lawsuit is pending.” The implication is that the defendants did not conduct a “notice and comment process” as they should have at the outset.
“There was no process that was followed, they didn’t do any analysis to support their decision,” Toor says. “They did nothing that involved any stakeholders. They simply issued these letters unilaterally, saying, ‘This is what we’re doing.’ “I believe it’s ultimately going to be resolved in a favorable manner,” he says of the lawsuit. “I think it’s just a question of how long it’s going to take.”
Toor says he is also encouraged by progress on legislation to reinstate PACE programs.
Democratic members of Colorado’s congressional delegation, including Sen. Michael Bennet, Rep. Jared Polis and Rep. Ed Perlmutter, have been especially supportive of the effort to restore ClimateSmart, co-sponsoring pro-PACE legislation and writing letters to everyone from interim FHFA Executive Director Edward DeMarco to President Barack Obama, whose administration has been supportive of PACE programs — and who appointed DeMarco to the otherwise independent regulatory agency.
Congressman Mike Thompson, D-Calif., and Sen. Barbara Boxer, D-Calif., were among the primary sponsors of bills introduced late in the last congressional session that would have reversed the FHFA’s decision on PACE. That legislation was unsuccessful, but Thompson has found more Republican support this time around and is poised to introduce similar legislation with a Republican co-sponsor.
Sandra Wiseman, senior legislative assistant to U.S. Rep. Dan Lungren, R-Calif., confirmed that Lungren is a likely co-sponsor, but it is clear that last session’s bill will not pass, so the plan is to write a letter to Fannie and Freddie requesting that they outline their specific concerns about PACE, then amend the legislation to address those concerns.
“I think it bodes well that there is now some Republican support,” Toor says.
Cisco DeVries, president of Renewable Funding, is considered by some to be the father of the PACE program. He is credited with concocting the idea in 2007 as chief of staff to the mayor of Berkeley, Calif., which, along with Palm Desert, Calif., was one of the first cities to undertake such programs.
He says the FHFA’s ban on PACE came as a slap in the face because proponents of the program had already addressed the regulators’ concerns.
“Essentially, they made an edict based on totally inaccurate information,” DeVries says. “Fundamentally, it was a problem of a new regulatory agency that simply did not take its time and do its homework, and could not take yes for an answer.”
One lingering question is what prompted the FHFA, Fannie Mae and Freddie Mac to pull the plug on PACE in the first place. Toor suspects that bank CEOs and climate-change politics may have been factors.
“I think the FHFA is one of those agencies that is completely dominated by the banking industry, and I think you had [George W.] Bush administration holdovers who just sort of hated clean energy,” he told Boulder Weekly.
Others say that the biggest driver in the decision was regulators’ paranoia over any perceived risk.
“I personally don’t believe it was a broader ideological battle over climate, because PACE is now, and has always been, non-ideological and bipartisan,” DeVries says. “Rick Perry, the governor of Texas, signed PACE legislation. It was the Republican leaders of the legislature in Florida that introduced PACE legislation. It’s not always about climate change. PACE is about jobs. It’s about energy independence. The way I started, in Berkeley, it was about climate. But that doesn’t mean that’s what it has to be for everybody. In fact, it’s not. I think it was a regulatory agency that could not see the forest for the trees.”
The decision to disallow PACE may simply have been a question of bad timing.
“If PACE had come along two years earlier or come along two years later, it would have been fine, but PACE showed up on the desks of the mortgage regulators and Fannie Mae and Freddie Mac at absolutely the worst moment for them,” DeVries says. “They were terrified of risk, and I think it made them irrational about PACE. … PACE should be the best assessment the mortgage industry has seen in its whole life. It’s the first assessment in which the property owner actually receives cash back. That’s never happened before. This is, in many ways, the single least risky new assessment that local governments have done. It increases the likelihood that [borrowers] will pay their mortgage on time.”
PACENow Executive Director Gabrielson says that of the approximately $50 million loaned for more that 2,000 projects nationally, not including those in Boulder County, there has been only one default so far, a statistic that should convince lenders that these types of programs are among the safest.
“Aside from Fannie Mae and Freddie Mac and the FHFA, I can’t find anyone else who doesn’t cheer about PACE and say, ‘That’s a nobrainer,’” Gabrielson says.
Asked about the motivation for the decision, he says that around 2000, banks started lending “to anybody and everybody,” and when Freddie and
Fannie followed suit, “everybody lost their shirts.” The banks and their CEOs “had no sense of risk and they damn-near ruined this country,” Gabrielson says, and while they emerged unscathed, Fannie and Freddie suddenly became “so scared of anything that happened on their watch that they could be blamed for.”
Asked whether politics over the climate-change debate may have contributed to the FHFA’s decision, Gabrielson says, “I don’t have any evidence of that. It’s not something that occurred to me.”
BOULDER STANDS OUT
DeVries and other national experts credit Boulder County with being the first to grow the program at such a large scale — and that actually may have contributed to the demise of PACE nationally.
Peter Swire, a law professor at Ohio State University who served as special assistant to the president for economic policy and who was involved in the discussions with the FHFA about financing PACE programs, told Boulder Weekly that it was actually the pace at which such programs were growing that alarmed federal regulators. Boulder County’s ClimateSmart program in particular was a red flag, he said, because it grew so quickly and was held up by the FHFA as an example of how expensive such loans could be, if allowed to multiply.
Swire says PACE supporters want to expand the programs exponentially, and federal regulators saw that as a risk. Whereas other special assessments attached to loans were limited to a particular neighborhood and a specific improvement, Swire says, FHFA saw PACE programs as a loan that could be expanded to “millions of homes in a short period,” and that was a perceived threat.
He dismisses the notion that politics over climate change were an issue.
“In fact, the regulators begged for other programs that would meet conservation goals,” Swire says.
But DeVries remains frustrated about the response to PACE programs.
“I think the great disappointment I have is that we’ve taken this tool that not only seemed to be a good idea, but actually was working really well and was absolutely living up to everyone’s expectations for it, and then they killed it just before it really took off around the country,” DeVries says. “And we can’t let that happen. So we absolutely need to get PACE back, because there’s no good replacement for it. There’s nothing else quite like it out there, so we’re going to keep fighting.”