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Sonoma County has suspended an innovative 16-month-old program to help property owners finance solar installations and other energy-saving retrofits after a federal agency announced Tuesday that such programs present a risk to giant government-chartered mortgage lenders.

The decision prevents new applications and freezes 578 pending applications with the county's Energy Independence Program. It does not affect participants who signed their deals with the county before Tuesday.

Still, the suspension of new business — and the federal guidelines prompting it — are a significant blow to the momentum and money flowing toward energy efficiency and green building locally, said county officials, contractors and others.

Some experts say the new guidelines also could affect many mortgage holders with no connection to the county's program by lowering loan limits.

"We were astounded, with all the emphasis the federal government is putting on energy efficiency .<TH>.<TH>. that the program would be deemed unacceptable," said Valerie Brown, chairwoman of the Sonoma County Board of Supervisors.

"It's just a disaster," said Craig Thompson, vice president of the Redwood Empire Redmodelers Association. Thompson said that a dozen of the association's 75 members have invested thousands of dollars each to gain certification in energy retrofit work since the program started in March 2009.

"That investment is now lost," he said.

The county initiative is one of number of government-financed home and business retrofit programs called Property Assessed Clean Energy, or PACE, that have been authorized by 22 states and supported by the Obama administration with $150 million in stimulus funding.

Sonoma County's program, the nation's first ongoing countywide program, has loaned $30 million for more than 1,000 residential and commercial improvement projects, including window and door upgrades and renewable power systems such as rooftop solar panels.

The county pays for the retrofits through municipal bonds and then places liens on the properties, which owners repay over a 20-year maximum term, plus interest, through their annual property tax bill.

The Federal Housing Finance Agency said Tuesday that such arrangements "present significant risk to lenders" and "are not essential for successful programs to spur energy conservation."

Federal officials took issue with the fact that PACE liens, like other property tax assessments, take priority over the mortgage if the borrower defaults.

County officials have said the money at stake isn't that much. In a foreclosure on a home with $10,000 worth of energy improvements, for example, the county would seek only back taxes — $500, plus interest, for each year of unmade payments — and not the full amount of the project debt, according to officials.

So far, no borrowers with a PACE lien have defaulted in Sonoma County, according to officials, and county records show that homeowners participating in the energy retrofit program are half as likely to default on their tax bill as non-participating homeowners.

A spokeswoman for the Federal Housing Finance Agency was not able to determine Wednesday how much money lenders have lost or stand to lose because of loan defaults associated with PACE programs.

In May, Fannie Mae and Freddy Mac, the two mortgage giants overseen by the Federal Housing Finance Agency, sent letters to affiliated lenders saying the energy liens could not take precedence over a mortgage but offered no guidance on how to handle PACE loans.

On Tuesday, the agency directed the two lenders to significantly tighten its loan requirements for new borrowers who have a PACE lien.

It ordered the lenders to raise their income ratio for borrowers and require that local affiliated lenders seek approval from Fannie Mae or Freddie Mac before approving any home loan including a PACE lien. Sonoma County already requires the latter step in commercial applications.

In a move that could affect a much larger number of borrowers, the federal agency also ordered lenders in areas where PACE programs are offered to lower the maximum amount all property owners can borrow to take into account the possible effect of PACE loans on lenders' cash security.

Because Freddie Mac and Fannie Mae control more than half of all home mortgages in the country, that requirement "could affect a significant pool of people" in Sonoma County, said Kathy Larocque, deputy county counsel for Sonoma County.

The guidelines could also affect buyers looking to finance the purchase of a home with an existing PACE lien, Larocque said.

"It just seems to discourage PACE programs generally," she said of the new guidelines.

The future of the Sonoma County's program depends especially on buy-in from homeowners, which represent 96 percent of all projects in the county.

Without that support, a program based only on commercial applications might not be viable, Larocque said. The Board of Supervisors is set to weigh in on that question Tuesday morning during a presentation and discussion of the new federal PACE guidelines as part of their regular board meeting.

Nationwide, the future of the PACE programs also depends on wrangling between state and federal officials. In recent weeks, Gov. Arnold Schwarzenneger, Reps. Mike Thompson, D-St. Helena, Lynn Woolsey, D-Petaluma, and Henry Waxman, D-Santa Monica, have all expressed support for the programs.

"PACE is a program that benefits both the economy and environment in California and our office will continue to push the Federal Housing Finance Agency to reverse its shortsighted position," said Evan Westrup, a spokesman with the state Attorney General's Office.

Local contractors and energy efficiency consultants, meanwhile, are lamenting the possible demise of a program that they say has been a boon to business.

State officials have estimated that PACE programs, most of which are just months old, could help drive up to $1 billion in new projects in California and create more than 20,000 jobs in the recession-wracked construction industry.

"You take this away, there's a hole, a big hole," said Craig Lawson of Santa Rosa-based Pinnacle Homes.

County, building industry and energy efficiency officials said they remain hopeful that a solution would be found in the Obama administration or in Congress to the impasse with the housing finance agency.

"I'm looking at this as a stumbling block," said Barry Cogbill, a Santa Rosa clean energy consultant and board member of Solar Sonoma County, a consortium of local governments and businesses. The county, he said, is "very motivated to keep (the energy program's) doors open. And we've got a lot of heavy hitters weighing in trying to get some sort of responsible policy in place."