06.30.2010 0

Distorting the Market Never Bodes Well for America

  • On: 07/11/2010 23:36:38
  • In: Economy
  • By Rebekah Rast

    The government must have a short-term memory.

    In the late 1970s America was in the midst of an oil crisis. It wasn’t out of the question for cars to be lined up at service stations for hours waiting to fill up their tanks. In response to this crisis, President Jimmy Carter pushed the government to spend billions of dollars on alternative fuel means like oil shale. As big oil companies began moving out to the northwest in states like Colorado to pursue creating alternative fuel, the market grew. New towns and houses started building up at rapid rates as the job market increased.

    What President Carter and the rest of the government didn’t expect was for the oil prices to go back down. Oil companies picked up and left these small towns as quickly as they had arrived. Houses were left vacated and towns made into ghost towns overnight. The housing market, job market and economy all took a huge hit.

    Oh how history repeats itself.

    As America’s economy and housing market is still reeling from the financial crisis of 2007, the Obama Administration is throwing money and incentives at companies and individuals to invest in green energy and do it in a hurry.

    One such program backed by the White House is PACE (Property Assessed Clean Energy). This program encourages homeowners to upgrade their homes with more energy-efficient extras — like solar panels.

    This program is backed by the Obama Administration, yet mortgage giants Freddie Mac and Fannie Mae, which are run by the federal government, oppose it. It should be clear that this program is flawed when two different parts of the same federal government don’t agree. Freddie Mac and Fannie Mae, along with its regulator, the Federal Housing Finance Agency (FHFA), say the program is too risky and could cause trouble for all involved.

    Because of the way PACE is financed, it has garnered a lot of support from local governments, green businesses and homeowners. PACE is funded through local counties selling municipal bonds. Loans are then given to homeowners with the repayment tacked on as a property tax, which can then be paid off over the course of 15 to 20 years. This is very beneficial for homeowners who want a solar system for their home, but can’t afford the $30,000 price tag to have one.

    “This market distortion caused by the federal government encourages homeowners to take on more debt, which greatly increases the chance of them defaulting on their loan,” says Bill Wilson, president for Americans for Limited Government (ALG). “At a time where we are facing an unprecedented housing crisis, this is an absolute wrong solution to the problem.”

    Gary Gerber, president and CEO of Sun Light & Power and President of CALSEIA (California Solar Energy Industries Association disagrees. “This is fantastic for customers who can finance over 20 years. It can be a direct swap of payment from your utility bill to your loan.”

    The problem with this program that mortgage bankers and the FHFA have is the type of loan that is given to these homeowners. Because the loan is added as a property tax it qualifies as a lien loan, which takes precedence over any existing loans you have on your home. If a homeowner were to default on this loan and be forced into foreclosure, the first loan to be paid off would be the lien loan from PACE, then the rest of the mortgage. This creates problems for banks, Realtors and Freddie Mac and Fannie Mae.

    “Because this results in a lien against property then that’s a legitimate concern,” says Lucien Salvant, managing director of public affairs at the National Association of Realtors (NAR). “If there is an attached lien that would result in the slow sale of a home and lenders wouldn’t even go near it.”

    The Mortgage Bankers Association (MBA) agrees. “While MBA supports energy efficiency in homes and financing for energy efficient improvements, we have concerns with the PACE loan program. We believe the program in its current form presents many obstacles to responsible lending including an absence of proper underwriting and approval processes that could cause borrowers to take out too much debt. In addition, when it is comes to selling the property with an outstanding PACE loan balance on the tax assessment, it will likely prove more difficult to find a buyer who is willing to take on that additional cost,” says an MBA spokesperson.

    Unlike a sidewalk or street assessment a home might receive, the type of property assessment given by local counties for PACE is voluntary and costly. Mortgage holders like Fannie Mae and Freddie Mac want to make sure that homeowners that are electing to use this program will benefit from it, or at least break even to prevent another crisis.

    “This program alters how the private sector does business,” says Alfred Pollard, general counsel at FHFA. “Many counties do not have underwriting standards that protect both the banks and homeowners. Some counties don’t even ask if the person wanting the loan is employed.”
    Other counties, like Sonoma County in California, do check homeowners to make sure they are paying utilities bills and other loans properly, says Gerber.

    The FHFA is working to create underwriting and consumer protection standards for programs like PACE to let homeowners and lenders know of the rewards and risks involved before they invest in any home energy-efficient incentive program.

    “We don’t have good national energy retrofit standards,” Pollard says. “How do we know what the return will be? We don’t have those metrics or standards that allow people to see if putting solar panels on their homes will pay off. We need to develop background tests and data first that the consumers and lenders can have to make sound decisions.”

    Garber doesn’t think research is needed. He’s seen solar systems going up on houses for the past 10 years and knows the savings that are produced. FHFA doesn’t argue that making homes more energy efficient is bad thing. Nor do Realtors. Homes that have upgrades like solar panels can push up property values.

    The problem lies in the unpredictability of energy costs and homeowners finding themselves upside down in their mortgages.

    “The government tends to push faster than the market goes,” says Edward Pinto, who is currently an independent consultant involved in housing finance, and formerly was the chief credit officer of Fannie Mae. “The government tends to run on autopilot. If something works they say more, if something doesn’t work, they say more.”

    ALG’s Wilson agrees and adds, “The government needs to stop picking winners and losers. If this Administration continues to throw money at green energy programs it will hurt businesses, the job market and the economy.”

    Because of the market we are in, it is not wise for homeowners to take out additional loans on their homes. Many lost their homes in the financial crisis and some homeowners are still upside down and paying more for their mortgage payment then what their house is worth.

    America cannot afford another crisis. History proves that when the government intervenes in the free market it will backfire. There have been enough examples of this in the past. There is no longer an excuse for ignorance for the Obama Administration.

    Author’s Note: These states have passed legislation approving of the PACE program: California, Oregon, Nevada, Colorado, New Mexico, Texas, Oklahoma, Louisiana, Missouri, Illinois, Wisconsin, Michigan, Ohio, North Carolina, Virginia, Maryland, New York, Vermont and New Hampshire. Only certain counties in each state have launched the program.

    Rebekah Rast is a contributing editor at Americans for Limited Government (ALG) News Bureau.


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