A New Way to Fund Green Home Renovations

How's this for a clever energy-saving program: homeowners borrow money for green upgrades such as new windows, water heaters, insulation or roof-top solar panels. The money, loaned by states and municipalities that issue bonds to cover the program, is paid back by homeowners over 15 to 20 years, via a property tax surcharge. It's a win for all: The energy savings cover the homeowner's extra annual tax payment; jobs are created; and the planet gets a break.

What's not to like? Apparently, plenty.

The Wall Street Journal reported recently that the program, called Property Assessed Clean Energy (PACE), is facing resistance from Fannie, Freddie and mortgage providers across the country, who are doing their best to undermine it.

Nonetheless, PACE bonds seem to be gaining traction.The first PACE bond was issued by Berkeley, CA in January, 2009. Since then, sixteen states have passed legislation to enable the bonds, and another couple are considering it.

One interesting twist to the program is that the tax is attached to the house, not the homeowner. So if the person who makes the upgrade moves, the new buyer inherits the property tax.

That's where the resistance comes in. Lenders worry that if the homeowner goes into foreclosure, the property tax will take precedence over the mortgage for repayment. States say this is essential if they want to float the public bonds that are financing the programs. But the Federal Housing Finance Agency told The Journal that these programs could encourage irresponsible lending (as opposed to the many reckless policies that the lenders themselves indulged in during the housing boom!).

As Greg Hale, a financial policy specialist and blogger for the NRDC points out, it's not hard to buffer against these potential pitfalls with the right requirements, which are likely to be part of most programs. Some of those include no-brainers like making sure borrowers are current on their mortgage and taxes, that a project's cost are capped at a certain portion, say 10 percent, of a home's value, and that the total value of this loan and any mortgage doesn't exceed the home's market value.

While lenders fret, many municipalities seem to be moving ahead. The city of Boulder, Co. launched the first phase of Climate Smart, its PACE program, a year ago and made nearly 400 loans worth $6.6 million, or an average of just over $16,700 per project. The city points out on the ClimateSmart website that the program also put 280 installers, contractors and other vendors to work, providing green-collar jobs and local economic stimulus. The city of Berkeley, CA, meanwhile, conducted a pilot project that focused only on solar photovoltaic electric systems and involved 13 homes. The city is hoping to expand the initiative via a statewide project.

We should start to see initiatives in the other 14 states start to roll out some time this year.

Attaching the loan to the home rather than the homeowner is innovative and perhaps clever. Here's why: For some of the bigger renovations projects like solar installations, it could be ten years before the homeowner makes his money back in lower energy bills, but according to the National Association of Home Builders, only about half of US homeowners stay in their houses for that long. So the ability to spread a project's cost over 20 years and several owners might make consumers confident that the project is worth the cost even if they only stay in a place for five or seven years.

The question that hasn't been answered and that really can only be answered over time is how the expense will affect the resale value of the homes. In theory, the energy savings outpaces the added property tax burden and the family who initiates the project presumably will see the reassuring drop in their heating or electric bills in the first year or two. But subsequent buyers will have to trust that the cost-saving is there; it's not going to be as tangible for them, while the added tax burden will be entirely tangible. Presumably they would be able to deduct the extra tax on their federal tax forms the way you can with other types of property taxes.

But even so, until the loan is paid off, and the seller can pitch the energy efficiency as a free-and-clear money saving feature that boosts the value or at least the saleability of the house, could the added tax costs actually dampen those things? That will probably depend on how educated the buyer is about energy efficiency and how committed he is to it.

Previous green lending programs have been left in the hands of traditional lenders--who can't seem to distinguish between irrational risk and genuine innovation--and have pretty much been neglected, ignored and allowed to wither on the vine. Ironically, because this program is in the hands of local governments, it seems to have a shot at taking root and growing. Despite some unanswered questions, it's a fresh, inventive program. It should be given its day in the sun.
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