Obama Boosts Clean Energy Lending That Critics Say Poses Risks

  • PACE helps homeowners pay for solar panels, other improvements
  • Changes could help firm with ties to ex-White House officials

President Barack Obama is moving to help homeowners finance clean energy improvements under a program widely touted by environmental advocates but criticized for putting borrowers and taxpayers at risk.

The changes, announced by the White House on Tuesday, could give a boost to Property Assessed Clean Energy lending, a nascent green-financing industry currently dominated by a company whose advisers include Obama’s former National Economic Council Director Gene Sperling.

PACE loans, which use local tax assessments to finance improvements such as solar panels or energy-efficient air conditioning units, generally have been barred by federal mortgage programs because the assessments get repaid first when a borrower defaults. If a home is worth less than the amount owed, taxpayers could recover less in a foreclosure.

The White House said the Federal Housing Administration and Department of Veterans Affairs will allow PACE loans on homes with FHA or VA mortgages.

“We are committed to ensuring that American families have options and have the ability to choose clean energy,” White House senior adviser Brian Deese said on a call with reporters.

Foreclosure Sales

Under the new rules, the portion of the PACE loan that’s in arrears will get paid before the FHA or VA mortgage in a foreclosure. The rest of the loan will get passed on to the next homeowner after the home is sold in a foreclosure sale.

The new rules should stimulate interest in a program widely sought by states and local governments but stifled by mortgage rules prohibiting its use.

Since 2008 more than 30 states have passed legislation enabling the PACE program for homes or commercial properties. Proponents say it is a win for both homeowners and the environment. They say the improvements can lower overall home ownership costs and raise home values, which would protect taxpayers in the event of foreclosure.

The changes could benefit San Diego-based Renovate America, which has issued more than $1.63 billion in such loans cumulatively since 2011, according to the company. Renovate America in June said it had closed its seventh securitization of PACE bonds in a $305.3 million transaction.

Senior Adviser

Sperling, who led the National Economic Council in the Clinton and Obama administrations, is a senior adviser for Renovate America.

He said he never spoke to anyone inside the administration about the PACE program and has spent his time mainly advising the company on strategy and product development and meeting with investors.

Other companies, including Ygrene Energy Fund and Renew Financial, have also securitized PACE bonds.

Before the changes, some homeowners who had gotten PACE loans complained of scuttled sales and other hurdles when they found government-backed mortgages couldn’t be made on the properties.

The revision announced Tuesday should mitigate such hurdles for loans backed by the FHA, which can insure loans to borrowers with down payments of as low as 3.5 percent and a credit score of as low as 580. Mortgages backed by Fannie Mae and Freddie Mac, which tend to back loans to borrowers with better credit, won’t be affected.

Endanger Borrowers

Some federal officials said they are concerned that PACE loans might endanger borrowers by getting them into debt that they can’t afford to pay.

“PACE programs in many, but not all, instances are administered by third parties that do not follow the same consumer protection requirements applicable to residential mortgage lenders,” Alfred Pollard, general counsel to the Federal Housing Finance Agency, said in June testimony to the California state legislature.

The FHFA, which regulates Fannie Mae and Freddie Mac, has shown little willingness to allow PACE loans on properties with a mortgage backed by one of those companies.

Increases Risks

FHFA Director Mel Watt in a statement on Tuesday said he’d continue to prohibit the companies from backing mortgages to homes with PACE assessments, saying that the structure of PACE loans increases risks to taxpayers.

California Governor Jerry Brown, on a call with reporters, called Fannie Mae, Freddie Mac and the FHFA “stubborn” and “unreasonable” for continuing to prohibit PACE financing.

“They’re acting like East Coast bankers,” Brown said.

The White House on Tuesday said the Department of Energy would put out for comment a set of best practices for PACE loans.

PACE loans can carry interest rates of 6 percent to 8.5 percent -- better than what borrowers would get by financing an improvement with a credit card, but worse than what can be had with a home-equity line of credit, which also has more stringent underwriting standards.

The Mortgage Bankers Association wrote to Consumer Financial Protection Bureau Director Richard Cordray on Friday asking him to review the program and saying that the loans put borrowers and taxpayers at risk.

“We are concerned that this program, as designed, would leave low and moderate income FHA borrowers more vulnerable to being misled and steered into financial obligations that they may not fully understand due to lack of disclosure,” MBA executive Pete Mills said in a statement on Tuesday.

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