Regulators refuse request to consider improvement loans as assessments

On its third anniversary, Sonoma County's ground-breaking clean energy program has reached $50 million worth of solar power and other home improvements, but also has stirred a hornet's nest of opposition from the nation's banking industry.

Six banking groups last week opposed the county's effort to change federal lending practices affecting homes in its energy program and others like it around the U.S.

For nearly two years, county homeowners routinely have been unable to sell homes or refinance loans without first paying off liens from such local government programs, known as Property Assisted Clean Energy, or PACE.

In 2010 the Federal Housing Finance Agency announced the federally controlled mortgage enterprises Fannie Mae and Freddie Mac would stop buying loans on homes that have such liens from PACE programs.

That announcement caused participation in the county program to be cut in half. The county sued, and a federal judge last year ruled that the finance agency had to go back and conduct a formal process to devise a rule on the issue.

The judge's ruling gave the county the chance last month to make its case to regulators. Nonetheless, the agency announced it wants leave in place its ban on buying loans of homes with PACE liens. And now the banking industry has weighed in with support for that position.

"While energy efficiency is a worthy goal, PACE super-liens threaten the lien position on which mortgage lenders, servicers and investors rely, and are disruptive to mortgage markets," a banking coalition wrote in a March 26 letter to regulators. "PACE financing is not an appropriate method for financing energy efficiency improvements for homes."

The coalition includes the Mortgage Bankers Association, American Bankers Association, Independent Community Bankers of America, Community Mortgage Banking Project, Consumer Mortgage Coalition and the Housing Policy Council.

Program supporters said the bankers are greatly overstating the risks of PACE programs and are failing to see the greater societal benefit from clean energy.

"They're about profits. We're about service," said Shirlee Zane, chairwoman of the county Board of Supervisors.

Zane acknowledged that PACE programs, including the county's, will have "a real hard time moving forward" unless the current rules are reversed.

"The problem with the rules is you basically don't allow PACE programs," she said.

County supervisors authorized the Sonoma County Energy Independence Program in March 2009. Sonoma was the first county in the nation to launch such a program. More than 25 states since have authorized the programs, but relatively few actually moved forward because of the objections of the federal regulators.

To date, over 1,600 property owners have participated in the county program. They have completed 1,000 solar installations and 1,600 energy efficiency products, which include new windows and furnaces, more insulation and other improvements.

Property owners can repay the debt over 20 years, plus interest, with their annual property tax bills.

A key disagreement concerns whether the energy retrofit debt is a loan or an assessment. County officials insist it should be treated the same as any other assessment on a property tax bill -- similar to a school tax or a water bond.

But regulators and the lending industry maintain the liens are loans and shouldn't be paid off before a home's mortgage in the event of a foreclosure.

Under current practices, local title insurance companies routinely point out the clean energy liens on title reports, and lenders respond by refusing to make loans until the liens are paid off.

The county may yet get Congress or a judge to force the finance agency to change its position. But local mortgage officers said it's unlikely the regulators or the mortgage enterprises they oversee will agree to new rules because it would amount to a huge change in the the way home loans are bundled into securities and sold to investors.

"Fannie and Freddie are not going to bend on this thing," said Otto Kobler, branch manager in Santa Rosa for Summit Funding.

The banking industry's objection comes as the county program is gearing up for an increase in solar projects. County supervisors last month dropped a rule that property owners needed to show a 10-percent savings in energy use before they could get financing for solar systems. Solar companies operators applauded the change.

So did Craig Lawson, president of Cal Custom Building Services in Santa Rosa, whose company makes a variety of energy improvements. Lawson called the county program "phenomenal" and he disputed the contention that it in any way harms lenders.

"Show me the risk," Lawson demanded.

Bill Barnett, a loan manager for Stearns Lending in Santa Rosa, agreed the county has produced a valuable clean energy program. But he suggested that the opposition of the banking industry could be too tough for PACE supporters to overcome.

"That certainly doesn't help an already uphill battle," he said.

You can reach Staff Writer Robert Digitale at 521-5285 or robert.digitale@pressdemocrat.com.