Until local programs like Property Assessed Clean Energy (PACE) allowed homeowners to repay their energy loans gradually through their property taxes, there were few opportunities for Americans to pay for sustainable energy systems like solar panels. 

But now, the Federal Home Finance Agency (FHFA), which oversees FNMA and FHMC (dubbed Fannie Mae & Freddie Mac) advised banks not to issue loans to homeowners with PACE financing – in essence blocking all Green energy initiatives.  What is their rationale?  FHMA asserts that homeowners who acquired PACE loans are in violation of the terms of their mortgage.  They claim that because the PACE liens take priority over mortgages, lenders are "at-risk" in the event borrowers default.

The reaction by most local governments, including San Francisco, was to suspend their plan.  But t

his narrow-minded thinking instigated by the Federal government presumes that Green energy systems are a liability as opposed to a capital improvement.  In a typical mortgage, debt is calculated as PITI (or Principal + Interest + Taxes + Insurance).  The reason PITI is calculated into the loan qualification is that if a homeowner is unable to pay their taxes and/or insurance, they are likely at-risk of defaulting on their mortgage. 

But what is not included in their affordability analysis is the energy cost of running the home.  This foolish oversight assumes that homeowners will live in the house without utilities - gas or electricity.  Why isn’t energy part of loan qualification?  Perhaps they feel the variable cost is harder to approximate?  But if lenders can qualify buyers for variable rate mortgages, why can’t they do likewise with energy, and just average the estimated utility costs? 

If a homeowner can not pay his or her utilities, s/he is just as likely to default on the loan!  When a home is appraised, the lender requires that it is livable.  So the appraiser must check that there is a functioning energy system in place.  If not, lenders will likely require that one be installed before granting the loan.  What happens when a house being sold is made of un-reinforced masonry?  Lenders would require buyer upgrade the home before escrow close - if they  allow it at all, because its vested interest would be at-risk should an earthquake topple the building.  Why should energy systems be treated differently?  If a house has a solar collector in place prior to close of escrow, it would be made a part of the mortgage.  Viewing a house without a solar collector should be viewed the same way as an un-reinforced masonry house. 

When the homeowner pays for the solar collector over the life of the mortgage, the system's upfront cost will be paid-off, not just from the owner's income, but from the energy being generated.  At some point, the system will likely even provide the homeowner with a positive cash flow.  So if the home’s energy system is included into the PITI calculation (PITI+E), the solar collector should decrease the homeowner’s chances of default.  The logic of the Federal Home Finance Agency (FHFA) is in error, and their policy should be repealed!

 

Jeffrey can be reached at tong.examiner@gmail.com