At Their Own Pace: Fannie and Freddie Don't Like Progress

The intervention in PACE of two of the most maligned agencies in the country shows that the federal government is still reacting to the short-sighted interests of groups that do not function with the public good as their goal.
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The events of the last several years, from the beginning of the recession in late 2007 through the financial bailout and the recovery package and to the present trembles of fear about a double dip, have shown the federal government to be reactive. This is not a slight of the Obama administration, or even of Congress. Instead, it is the result of a longer trend in which government is no longer seen as the creator of the conditions for prosperity, but instead as a janitor who at best cleans up after the mess has already been made.

There are exceptions, of course. Health care reform is a gigantic, if overdue, sign of progress. But financial reform, the stimulus package, the financial bailout, repeated (and, currently, not repeated) extensions of unemployment benefits, the response to the Deepwater spill -- all of these have been made necessary by a private sector in the driver's seat, drunk after too many years of the federal government looking to it for direction.

Even when the federal government is proactive and lays the foundation to improve the economy and the environment for most Americans, powerful and unrepresentative interests intervene.

Take the recent experience with a program to finance energy-efficient retrofits called PACE (Property Assessed Clean Energy).

Over the last several years, local governments -- quite often the source of policy innovation these days -- led by Berkeley, California have devised a unique way of financing energy-efficient home improvements. Recently bolstered by federal funds to expand the program, local governments issue municipal bonds that allow them to lend money to homeowners for retrofit projects that create energy savings. The brilliance of the plan is in its financing: the loan is attached to the homeowner's property tax bill (similar to what occurs with property tax assessments for public infrastructure like sewers and roads) but remains with the house (so the loan is really less loan and more tax assessment). This avoids two obstacles that prevent many homeowners from investing in energy-efficiency improvements: the high upfront cost and the risk that the homeowner will sell the house before realizing the benefits from the energy savings.

The program reduces energy emissions that negatively impact neighborhoods and communities throughout the United States by contributing to climate change, while at the same time creating savings on energy costs without burdening households with a lump sum payment for expensive energy-efficiency retrofits. Plus, the retrofits increase a house's value, benefiting not only the homeowner but her neighbors as well. The benefits to homeowners and to the community are manifest.

The Obama administration and Congress both like PACE. But programs in cities throughout the country have come to a screeching halt because Fannie Mae and Freddie Mac, those tireless protectors of the interests of the American public, are concerned about how the loans are structured. In particular, Fannie and Freddie and their regulator the Federal Housing Finance Agency are worried because holders of the PACE assessments are paid back first before lenders (that is, Fannie and Freddie) who hold first and second mortgages on the property. This, the government-sponsored enterprises argue, raises "safety and soundness" concerns.

As many others have pointed out, this argument is largely baseless. Yes, Fannie and Freddie are used to being first in line to be repaid, but they don't raise similar issues about other tax assessments (such as those for sewer lines and sidewalks). The likely cost of the PACE assessment in the case of default is almost de minimis. Additionally, New York Times writer and Grist contributor Todd Woody reports that the FHFA rejected an offer from the Obama administration that would have guaranteed PACE-related mortgage losses for two years, essentially making the loans risk-free.

Fannie and Freddie's motivations are unclear. The Sierra Club's Carl Pope suggests that the agencies are eager to keep cheap public money from competing with the private sector's more expensive loans. The agencies might also be looking to limit an expanded use of tax assessments by spreading the false notion that only "big" infrastructure projects like sewers and sidewalks have community benefits.

The real issue here is that Fannie and Freddie are driving the policymaking around PACE. Despite the issuance of guidelines for the program by the Obama administration and by the Department of Energy, Fannie and Freddie's decision has won the day.

PACE is an example of state and local governments and the federal government laying the groundwork for private individuals to make good, environmentally-efficient decisions that money and information are currently holding them back from making. But the intervention of two of the most maligned agencies in the country shows that the federal government is still reacting to the short-sighted interests of groups that do not function with the public good as their goal.

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