Situation Room tableWhitehouse.govWhy isn’t the Obama team trying harder to save the promising PACE clean-energy model?

Mortgage giants Fannie Mae and Freddie Mac have essentially quashed Property Assessed Clean Energy (PACE) programs, which have been launched in local communities around the U.S. to make green improvements more affordable to homeowners. The Obama administration has taken modest measures to help out, but it hasn’t put its top people on the case. If it did, there’s reason to think PACE could be quickly restored.

Instead, Fannie and Freddie are undermining administration priorities like clean energy, energy efficiency, job creation, homeowner relief, and economic stimulus.

“If [the White House] wanted Fannie and Freddie to look at it, Fannie and Freddie would look at it,” said John McIlwain, who spent five years at Fannie and is now a senior fellow for housing at the Urban Land Institute. “It hasn’t reached a high enough policy level within the White House. … It’s just a shame.”

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PACE works by letting homeowners pay for rooftop solar arrays and energy-saving retrofits through a surcharge on their property tax bills, paid back over 10 to 20 years. In this way it removes high upfront costs and ensures that property owners don’t lose out if it they sell — the new buyer inherits both the home improvements and the tax assessment. The Berkeley-born model creates work for building contractors, cuts carbon pollution, and essentially runs on private capital, since cities and towns that offer PACE fund it through municipal bonds.

Until late spring, PACE was spreading at a steady clip: Twenty-two states had endorsed the model and encouraged municipalities to set up programs. San Francisco had just launched a program and Los Angeles was preparing for one later in the year. The Obama administration backed the model with $150 million in stimulus-act funding and an endorsement from the vice president’s Middle Class Task Force.

Then Fannie and Freddie threw the nation’s first programs into confusion in May by warning lenders to stay away from properties with PACE assessments. The mortgage-finance corporations object to the liens that PACE puts on properties, which get paid off ahead of mortgages if a borrower defaults. That adds a theoretical risk into an already jittery credit market.

But it’s an unfounded fear, since well-designed energy retrofits can add to a homeowner’s financial security, cutting their utility bills and making them a safer bet for lenders. A report commissioned by a major financial institution last year found that energy-efficient homes had default and delinquency rates 11 percent lower than other homes. PACE advocates have worked to integrate standards to ensure the quality of energy retrofits, but that work can’t continue with programs stalled out.

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FHFA declined to comment except to say that it “continues to work with federal and state officials regarding potential revisions to the PACE programs.”

California’s attorney general and Sonoma County, Calif., have sued to defend the model, but resolution from the courts could take years. Democrats in the House and the Senate have introduced bills that would restore PACE, but Senate dysfunction makes a legislative solution unlikely. Rep. Steve Israel (D-N.Y.), sponsor of one of the bills to save PACE, says negotiation is actually the best near-term option, but that hasn’t worked so far either. Israel proposed a PACE pilot program to the Federal Housing Finance Agency, which regulates Fannie and Freddie, but FHFA hasn’t responded (at least publicly).

Mid-level administration officials have tried to step in too. Cathy Zoi, an assistant secretary at the Energy Department, made a bid to save the program, but was flatly rejected. The Energy Department even offered FHFA a two-year reserve fund to guarantee against losses, according to The New York Times. That offer was refused.  Officials from other agencies — White House National Economic Council, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, and the Treasury Department’s Office of the Comptroller of the Currency — have been part of talks attempting to resolve the standoff.

But so far no administration bigwigs have made any public efforts to save PACE.  Carol Browner, Timothy Geithner, Lawrence Summers, Rahm Emanuel — where are you?  Any one of them could get FHFA’s attention fast. 

The unusual structure of Fannie and Freddie does complicate the situation.  The government-sponsored mortgage corporations, which back about 75 percent of all home loans in the U.S., were bailed out by the feds in September 2008 and placed under the conservatorship of the newly formed FHFA. FHFA is an independent agency — the president appoints its director, and the appointment requires confirmation from Congress. (President Obama hasn’t yet nominated a permanent director.)

Though the relationship between Fannie and Freddie and the U.S. government is murky, the Obama administration has a lot of power to make change.  The Treasury Department has injected $146 billion into the corporations over the past two years — talk about power of the purse.  And the administration is working up a plan to overhaul Fannie and Freddie. 

But Team Obama’s hands-off approach on PACE fits a broader trend of bowing to regulators on financial policy, according to Alyssa Katz, who reported on the housing finance collapse for her book Our Lot: How Real Estate Came to Own Us.

“My sense is that this administration, on questions of banking and finance, has deferred to regulators and not tried to run policy from the White House, at least openly,” she said.

“It’s understandable, given how many interests have a lot at stake in these regulators’ decisions while they’re trying to retrofit and reengineer the financial system. Politically, there are just too many demands coming
from too many directions on too many fronts.”

But you could also argue that there are too many national problems for the administration not to use a tool that cuts carbon pollution, creates construction jobs, and provides homeowner relief all at once. Time to start making phone calls.