At Rod Stevenson's sprawling country home in Santa Rosa, Calif., in Sonoma County, once-leaky walls and windows are now sealed tight for energy efficiency, and his roof and yard are glittering with two dozen solar panels.
"We expect to save about $10,000 a year," on electricity and heating bills, Stevenson says, a nearly 70 percent drop from last year.
Stevenson, 62, runs a successful, century-old family business that sells construction supplies and materials to control soil erosion in Northern California. But retirement was hanging over him and his wife. "I really wanted to get to the point where we could get our [utility] bill down to virtually nothing," Stevenson recalls.
So last year, after spotting an ad for a local financing program that lets homeowners slash energy consumption at no upfront cost, he applied. Since October, Stevenson has borrowed $140,000 from Sonoma County to retrofit his $1 million home and add renewable power. The debt gets repaid over two decades through a special assessment of $3,500 on his twice-yearly property tax bill.
"It just made dollars and sense to do it," Stevenson says.
The three-year-old initiative, called the Sonoma County Energy Independence Program, is one of the few and the largest in the country to embrace the contentious Property Assessed Clean Energy, or PACE, model. So far, the financing technique has helped about 1,720 Sonoma homeowners and 50 commercial property owners upgrade their homes and buildings.
One of the richest counties in California, Sonoma has spent more than $56 million in public funds to finance the liens. That investment has created 680 jobs across the U.S. clean economy, including about 70 local positions in construction and engineering, the county says.
Today, cities and counties nationwide are looking to Sonoma for guidance on how to get their own such programs off the ground at a difficult time, when federal authorities have branded PACE a steep risk to the still-shaky U.S. housing market.
Inside the PACE Program Controversy
The PACE financing technique was developed in 2008 by the City of Palm Desert in California's Coachella Valley. The city crafted statewide legislation, called AB811, which gave California cities and counties the greenlight to adopt the model.
The idea was based on a decades-old scheme for infrastructure projects. Local governments that want to build sidewalks or fire stations, for instance, can finance them by tacking special assessments on residents' property taxes. When homeowners sell their properties, the new owners inherit the surcharge.
The PACE program was seen as an engine for energy improvements and job creation at a time when banks were increasingly hesitant to approve loans for expensive upgrades. For every 100 homes that get major retrofits, at least 10 jobs are created, says PACENow, an advocacy group.
More than half of states passed laws permitting local governments to adopt PACE financing. And in early 2010, the Department of Energy awarded $150 million in stimulus to help dozens of localities jumpstart their programs.
Little of that, however, trickled to PACE initiatives. In July 2010, the Federal Housing Finance Agency (FHFA), overseer of the nation's largest mortgage buyers and resellers, Fannie Mae and Freddie Mac, issued a statement saying PACE posed "significant risks" to mortgage finance companies and urged all local governments to suspend their programs.
Most did just that. And the DOE, unable to persuade the agency to accept the PACE model, instructed recipients of PACE funding to direct that money toward other efficiency programs such as cash rebates for energy-saving appliances.
Today, having a home with a PACE loan is like being branded with a scarlet "R" for risk, advocates lament.
Fannie Mae and Freddie Mac, among others, have refused to accept new mortgages with PACE liens. Owners who want to refinance old mortgages are required to pay off their PACE debt before companies will agree to new terms or conditions on their mortgages.
FHFA says there are valid reasons for this. In most states, PACE payments—like all property tax assessments—are given "first lien" status. Meaning, if a PACE home goes into foreclosure, local governments must get paid back first, followed by mortgage companies—a situation that could cause losses to mortgage firms if homeowners default on both debts.
An FHFA spokesperson says the agency "worked with government agencies and met with PACE representatives regarding the risk from the absence of sound underwriting and the effect of the first-lien positions" in the PACE model. "FHFA is charged with preserving and conserving assets, which includes avoiding safety and soundness risks to Fannie Mae and Freddie Mac."
But advocates of PACE reject the idea that it's risky lending. The National Resources Defense Council, an environmental advocacy group, says that of the 2,700 homes with PACE assessments nationwide, only 24 properties—less than one percent—have defaulted on their mortgages. Overall, more than 4 percent of mortgage loans are in foreclosure nationwide.