Energy efficiency helps homeowners avoid foreclosure
Energy-efficient homes have significantly lower default and delinquency rates than typical homes, according to an internal analysis conducted for a major financial institution last year. Here’s yet another reason why it makes no sense that Fannie Mae and Freddie Mac have effectively killed Property Assessed Clean Energy (PACE), a financing tool that has helped make efficiency improvements affordable for thousands of American homeowners.
Homes built to federal Energy Star standards for efficiency had default and delinquency rates 11 percent lower than other homes, the 2009 analysis found, according to two people familiar with the document. The analysis accounted for variables including income and location, since many new homes are built in sprawling areas (where high transportation costs contribute to foreclosure rates).
“It was a robust statistical analysis that found, with a 99-percent confidence interval, that energy-efficient homes had significantly lower default and delinquency rates,” said one person. Both sources asked to remain anonymous to protect relationships with finance institutions.
Fannie Mae and Freddie Mac have effectively shut down PACE programs around the nation. The programs let homeowners tack the cost of insulation, furnaces, and other efficiency improvements onto their property tax bills, letting them gradually pay off the cost over 10 to 20 years. The tax assessments are “senior” to mortgages, meaning they get paid off first in a foreclosure, which concerns Fannie and Freddie, the government-sponsored mortgage-finance corporations that guarantee more than half of the nation’s mortgages.
A letter from the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, claims PACE programs “pose unusual and difficult risk management challenges” for lenders. But the internal analysis supports what PACE defenders have been claiming — that energy-efficiency improvements, when done correctly, make borrowers more financially stable, not less.
“If you’re Fannie or Freddie, in many ways PACE should be the best tax or assessment you’ve ever seen, because it improves cash flow,” said Cisco DeVries, president of Renewable Funding, a company that sets up PACE programs for cities and counties. “Homeowners are reducing their energy bills. No other assessment does that. For a sewer system [a common use of tax assessments], you have access to sewers, which is great, but it’s not like your cash flow improves.”
The research in the internal analysis does not focus on PACE or other financing methods, but it addresses the core focus of PACE: the energy use of buildings. Most PACE programs require an energy audit and efficiency improvements before funding rooftop solar or wind (since it’s a waste to put solar panels on a leaky building). Buildings account for 38 percent of the nation’s carbon dioxide emissions, so retrofitting them is a crucial near-term step in addressing climate change — with the added bonuses of creating local jobs and cutting utility bills for property owners.
The nation’s largest PACE program, in Sonoma County, Calif., has also found that energy-saving improvements tend to make homeowners more financially secure. The property-tax delinquency rate for the county’s 900-some PACE participants was 1.2 percent, compared with 3.5 percent for the county as a whole, according to deputy county counsel Kathy Larocque.
“The people in our program are better taxpayers than the general public,” she said.
Sonoma County residents have jumped at the chance to make home improvements through the program since it launched last spring. The county expected investments to reach $7 million or so in the first year; instead they reached $30 million as of last month, according to county Treasurer/Tax Collector Rod Dole.
Another year-old program in Boulder County, Colo., proved popular with residents, helping them make more than $10 million in home and business energy improvements. Middle-school teacher Kayla Thomason wanted to join in; she applied for $11,000 in funding to fix up her leaky house, had a home-energy audit performed, and had contractors bidding on the work — and then Fannie and Freddie forced the program to shut down.
Boulder County commissioner Will Toor says local residents are anxious for the program to get back up and running. “The reactions that we’re getting from people are primarily anger at Fannie and Freddie, as opposed to people feeling like there’s something wrong with the program,” he said. “If we can get the federal issues resolved and clearly state to people that we’re able to move forward, I think that we will see people still participate. I don’t think it will be a long-term blow to the program, once we get the issue resolved.”
Dozens of members of Congress, governors, and mayors have spoken up in support of PACE. Rep. Steve Israel (D-N.Y.) said he plans to introduce legislation addressing Fannie and Freddie’s concerns, but there’s no sign that the bill would move quickly through Congress. The Department of Energy, which invested $150 million in stimulus money in PACE programs, urged Fannie and Freddie to let the programs proceed, without success. It even offered FHFA a two-year reserve fund to guarantee against losses, an offer that was refused, according to The New York Times.
“Every single issue raised by FHFA was raised previously and resolved, from almost everybody’s perspective, with excellent answers,” said DeVries of Renewable Funding. “It’s clear they didn’t want to take ‘yes’ for an answer.”
Spokespersons for Fannie Mae and FHFA did not respond to requests for comment.
Do you have more information on Fannie, Freddie, and the PACE dispute? If so, we’d like to hear from you (jhiskes [at] grist [dot] org).