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Participation in Sonoma County's ground-breaking energy retrofit program for homes and businesses has dropped dramatically over the past six weeks, and recently issued federal rules are to blame, county officials said.

Since July 6, when federal housing officials said the retrofit program and others like it posed a risk to the government-chartered mortgage giants Fannie Mae and Freddy Mac and ordered a clamp down in lending practices, the average number of weekly applications received by the county's program has dropped by nearly half; signed contracts are down by a third.

Total applications received in the six-week period this year are down 58 percent from the same period last year. Contracts have dropped 75 percent. More than 20 participants have also pulled out of the program since last month.

"This should be our busy season," said Liz Yager, program coordinator of the Sonoma County Energy Independence Program. "(But) a number of people we've talked to that are interested are in a wait-and-see mode."

The hesitation stems from the possible repercussions for a home or business owner of signing up with the program, county officials said.

Many could have trouble refinancing their mortgage or selling their house because of new federal rules.

In the extreme case, a program participant could also be considered in default on their mortgage, not because of any mortgage payment problems, but because of the way retrofit money is repaid.

And, just because they live in a county where a retrofit program is offered, Sonoma County's 100,000 home mortgage holders, most of whom have no connection with the program, could also see their borrowing limits reduced by as much as 10 percent.

"There's so much uncertainty among people about what actions Freddy (Mac) and Fannie (Mae) might take," said Yager.

The new rules were issued by the Federal Housing Finance Agency, which oversees the two mortgage giants. Their beef is with the way the county and municipalities with similar programs — known as Property Assessed Clean Energy, or PACE — seek repayment for the money they lend to property owners for retrofits.

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

Such liens, like other property tax assessments, take priority over a mortgage if the borrower defaults.

The two-year-old housing finance agency said the arrangement presented significant risk to Fannie Mae and Freddie Mac, which control half of all home mortgages in the country. It ordered the mortgage giants to have lenders tighten their loan requirements for new PACE program participants and clamp down on all lending in areas where PACE programs are offered.

County officials have blasted the move.

"There's no question this is a dangerous federal overreach," Supervisor Efren Carrillo said this week at the Board of Supervisors meeting, where county staff gave an update on the program.

"It's another example of the often poor communication that goes on between different levels of government," said Supervisor Shirlee Zane.

Supervisors suspended the program after the rules were issued, but re-opened it a week later after hearing strong support from contractors, clean energy advocates and others who have benefitted from the program. In a recent county survey involving nearly 60 local builders and solar installers, almost half reported that a quarter of their business is connected with the program, and more than half had hired additional employees for the work.

Since mid-July, county officials and those behind similar retrofit programs authorized in 22 states have lobbied federal legislators and the White House to craft a solution that overrules the housing finance agency.

The county has also sued the housing agency and Fannie Mae and Freddie Mac over the rules. The state and the Sierra Club have done the same.

Two bills carried by Sen. Barbara Boxer, D-Calif., and Rep. Mike Thompson, D-St. Helena, would require federal regulators and Fannie Mae and Freddy Mac to allow the property assessments used in the retrofit programs and prevent any discrimination against jurisdictions that offer the programs. The legislation has not reached committee.

County Auditor Rod Dole said he's not sure the bills will mollify the housing agency, which he said refused a White House plan to back PACE-program foreclosures with a reserve fund.

"I haven't found anything that does satisfy them at this point," he said.

In the meantime, several local homeowners with energy retrofits have faced difficulty either selling their houses or securing refinancing because their lender was doing business with Fannie Mae or Freddy Mac, he said.

Other banks, including Wells Fargo and Exchange Bank have provided assurances that they would not be clamping down on program participants, he said.

"The assumption was that they would not be able to sell those loans to Fannie or Freddy," he said.

Dole said he wasn't aware of any tighter lending limits being imposed countywide because of the new federal rules.

The county has loaned $32 million for 1,049 retrofit projects, including window and door upgrades, renewable power systems and water-saving projects.

Officials said the program was not in any jeopardy of having to close.

"We're sustainable at this level. We can make this work," said Yager, the program coordinator.

But she said that plans are afoot to ramp up marketing and counter the recent slump in participation.

"It's just a challenge right now as to how you frame the message," she said.