Fannie Mae and Freddie Mac Create a Blip

Energy Retrofits Hit a Roadblock: 
Another Federal Government Policy Setback 

In an earlier Blog Post I wrote about the financing innovations -- that would spur more energy retrofits -- in Sonoma County, California and Boulder, Colorado.

The Government, through its quasi-free-market entities Fannie Mae and Freddie Mac, have shut down those financing schemes that would, if they could get going, have helped move us away from fossil fuels to alternatives.  And, helped us conserve on what we're already using.

The method of Property Assessed Clean Energy (PACE)  financing was a small revolution in the field: homeowners get to upgrade their home -- solar, new furnace, water heater, efficient lighting, etc. -- and have the investment stick with the house.  Sell the house in five years?  If you move, you don't have to keep paying for it: the new owners have the expense.  And, the benefits, too: lower energy bills; a home (supposedly) with a higher market value, etc.

The story first broke in the New York Times on July 3 and has had a cascading effect on the entities that actually do the financing and, more importantly, on the Contractors who ramped up for this market.  They thought it was a safe bet.

Congressmen Henry Waxman and Barney Frank spoke out strongly against the ruling.  (I think they have some idea of the implications to the "market.")

Now, major companies like Recurve, who has an "arrangement" with Big Box Lowe's, had to lay off a good portion of its workforce.  And, put projects on hold.

Sheila Horton, Executive Director of Boulder Area Rental Housing Association, reports that the financing entity there has halted loans/liens on residential housing after the announcement.

Sonoma County Building Performance Contractor John Sutter has written to the loan giants and expressed his mystification in a letter and made the following concrete recommendation:

 "Reach out to the proponent’s of PACE and attempt to achieve some compromise arrangements, and do it with a sense or urgency.  The “green shoots” of this program will be dead within weeks or months, not years."  -- John Sutter, President, Applied Building Sciences, Santa Rosa, Ca.

What it will take to start things up again is not clear.  I think Sutter is right, though: the green shoots will die off quickly.

What are the implications of this situation?  Do the 22 states who've authorized PACE financing have egg on their face?  I don't know.  But while all the entities were messing around with the creation of regulations -- EPA, Municipal Consultants, State Agencies --  it would appear that someone(s) could have given a little more attention to the housing financing agencies.

Yes, this is armchair quarterbacking, but I did publish my concerns with an attempt to "over-regulate" this market before it ever got started.  Where we go from here is...up.  I guess.

For a view of how Sonoma County's financing agency has dealt with this setback, read their letter:
SCEIP Letter to Applicants / Participants.

Financing for Energy Independence: Novel Ideas

Innovation Facilitates the "Market"

One of the outstanding innovations that Sonoma County has spearheaded for the development of its Building Performance Energy Retrofit (BPER) market is the creation of a financing arm for building owners.  Gotta give some credit where it's due.  


SCEIP (Sonoma County Energy Independence Program), pronounced like the web-based communications tool (Skype),  is a forward-looking endeavor with some innovative lines.  SCEIP gets its money from the County's working capital and uses it to lend to BPER or Energy Replacement (solar panels, new furnaces, etc.) projects.  It's helping building owners put technologies into play that the owners might not purchase were it not for the clever financing and open market models.  


The funds from SCEIP could, for example, be used to insulate a building (home), upgrade / install new windows, install a new furnace, a tankless / on-demand water heater, etc.  The minimum financing right now is $2,500 which is pretty easy to get to in this wild and wooly new market.


SCEIP is interested in safety and security, too: it requires, for now, that any of the financed work be done by a certified installer with special licenses and certifications (HERS II, CBPCA, BPI) to assure compliance with code and energy retrofit specifications.  New rules will have to be invented to allow the Do-It-Yourselfer (DIY) to get access to the money.  


John Sutter, President of Applied Building Sciences, says: "This [SCEIP] is a game changer."  


The really clever piece of architecture underneath SCEIP's design is the "revolving door" of money that it has engineered.  SCEIP takes all of its loans and packages the liens into bond instruments and sells them on the open market at 5% interest to the investor.  


SCEIP gets more cash  -- working capital -- from the County and...they do the same thing all over again: lend out money, secured by liens and, then, package the loans as bonds.  Investors are happy, right now, to get 5% on their safe bonds, secured by Property Tax income streams and Liens.  


Some of the thinking that appears to have gone into the SCEIP idea includes: 

• a supply of relatively inexpensive money for energy upgrades
• the investment in the property stays with the property, not the current owner, so the asset(s) are tied to the piece of real estate
• bonds sold off of these property liens are relatively secure; the default rate has been, historically, quite low

Looking into the future, we believe that competition will arise and the County will have other providers trying to come into niches of the market and, likely, lend on these secure deals.  We predict that these financiers will, ironically, find themselves in the higher ticket projects.  


We also believe we're going to see at least 10% of the property owners struggle with paying their new tax bill -- humans just don't save and, ultimately, will find themselves confronted with a bill they didn't anticipate or plan for.