State Pushing Sub-Prime Energy Home Loans

May 24, 2012

By Wayne Lusvardi

Wasn’t the sub-prime disaster of the last decade bad enough?

From 2003 to 2007, it was likely the Association of Community Organizations for Reform Now (ACORN) helping unqualified low-income renters fill out sub-prime home loan applications to buy homes at an inflated price. This may have resulted in a foreclosure or an “underwater” mortgage with more money loaned than there was actual market value in the home.

Now, the California Energy Commission is sending canvassers into single-family residential neighborhoods to offer homeowners one-stop home energy improvement loans with a rebate.  CEC will batch the names of interested homeowners and then find them a home energy improvement contractor, a lender and an appraiser, and do everything for them through its Energy Upgrade California program.  Several friends have already informed this writer that canvassers have come knocking at their front door offering such a package.  And the canvassers are apparently paid for by the CEC.

California politicians are in a panic. It is an election year.  Unemployment has barely ticked downward in California.  And worse: by 2015 California’s “Renewable Energy Portfolio” of 33 percent green power will lower every household’s income by $2,400 per year. Additionally, California’s Cap and Trade program, which requires industries and utilities to buy pollution permits, will cost about $500 per year per household loaded into the price of everything ($6.25 billion per year divided by 12,393,852 California households).

Dirty Secret: No payback on energy loans in down market

No matter what cost savings the contractors and loan brokers promise homeowners for taking out an energy improvement loan, they won’t tell them the dirty little secret about such loans.  There is no payback in a down real estate market.  Buyers won’t pay for upgraded energy efficient windows, solar panels, window caulking, or attic insulation when the market is depressed.  And economist Gary Schilling, who has predicted all the recent recessions, is forecasting that home values will drop another 20 percent this year.

But homeowners might say they don’t care as long as their power, natural gas and water bills can be lowered.  However, another problem is the payback period.  Most major energy improvements take seven years to break even with what they cost to install, plus the interest cost on a loan.  If a homeowner moves within that period, it would not be worthwhile to take out an energy improvement loan.  And if the home is so old that its highest and best future use is demolition for a new home, then spending on energy improvements would be a loser.  One might be restricted from demolishing one’s home within the period of the loan.

Most cost-effective energy-efficiency improvements do not need a contractor to install.  Using contractors picked by the state will only inflate the price of such upgrades because the contractors will likely have to comply with Davis-Bacon Act prevailing wage laws and other costly regulations.  And the $1,000 to $1,500 rebate will likely only cover the cost of the building permit. This would result in more jobs for municipal unions.  Most energy efficiency upgrades can be done more cost effectively by homeowners.  Any government inducements for home energy efficiency improvements will only result in an inflationary bubble, especially in a recessionary real estate market.

Many homeowners are fearful of pulling building permits for older homes because the homeowners would likely be forced to bring the entire structure up to code.  For example, this writer relocated an 82-year-old lady from San Marino, Calif. to San Antonio, Tex. this past year.  A prospective buyer of her California home wanted to install a new electrical panel with circuit breakers as a condition of sale.  The city of San Marino would not allow her to upgrade the electrical panel in her home unless she brought the entire structure up to building code at a cost over $150,000.  In a falling market, this was economically infeasible.

Local building code compliance is a barrier to energy-efficiency loans.  This is especially so for old commercial buildings, where it would be cheaper to demolish the structure than install any energy improvements that might trigger full building-code compliance or an Americans with Disabilities Act noncompliance lawsuit.

Older homes would be the best candidates for home energy loans.  New homes built after 1978 are constructed with modern energy-saving improvements to conform to Title 24 – Energy Efficiency Building Codes.  About 60 percent of California’s housing stock was built before 1978.  But the California Public Utilities Commission has been mandating electric and natural gas utilities to provide energy rebate programs for the past four decades. So the actual number of homes that might benefit from energy improvements is uncertain and likely over-estimated.

But not to worry: President Barack Obama has rigged the rules so that you can get a higher real estate appraisal for any energy improvements that you install.  Federal regulators might even take away an appraiser’s license if they have an independent opinion that such energy improvements don’t add value to your home.  Apparently, there no longer are independent real estate appraisers, bankers, contractors, or home energy payback consultants.

And federal tax credits for home energy efficiency improvements for home purchases in 2012 have expired.

Repeating the sub-prime loan meltdown

Evidently, we have learned nothing from the collapse of the national bank financing system in 2008. Opportunist legislators are still clamoring for bubble financing to create jobs and provide banks with loans that might save on energy costs that cannot be recouped upon resale of the home.  The California Energy Commission apparently has no conscience about proposing bubble financing for deadweight energy-efficiency improvements in a declining real estate market. And banks will probably have to comply with new energy loan quotas to keep their banking charters in the state of California or face penalties for discrimination.

As we can plainly see with the CEC’s Energy Upgrade California program, perverse incentives for “greed” start out as well-intentioned and slickly marketed proposals, fashioned by government and highly regarded academic institutions such as U.C. Berkeley, as well as by low income or green advocacy special interest groups. It does not start with banks.  Banks will be prone to being corrupted, but only to keep their bank charters.

Banks will be prone to securitizing such high-risk energy loans by slicing and dicing them to spread the risk of ultimate losses among many lenders. This is precisely what happened with sub-prime home purchase loans during the 2008 mortgage meltdown and bank panic. Banks were unjustly accused of causing the mortgage meltdown by securitizing their loan portfolio of what they knew to be high-risk loans. But it wasn’t securitizing such bad loans that caused the mortgage meltdown as much as it was government policies. The same situation will likely repeat itself with home energy loans in California.

Is California now a predator lender?

The state of California has now joined the ranks of the so-called predator lenders. Once again, low-income homeowners will be the likely targets of the Energy Upgrade program. This is because many middle class homeowners will be more likely to understand that utility bills may be reduced but home energy improvements won’t likely add value to their property.

Where are the Occupy Wall Streeters?   One of their demands was: “Begin a fast track process to bring the fossil fuel economy to an end while at the same time bringing an alternative energy economy up to energy demand.”  California’s Energy Upgrade California program is creating just such an artificial demand.  We can only imagine as homeowners later complain about unrecoverable energy improvement loans that the Occupy Movement will be protesting for debt forgiveness.

Conversely, the “fracking” energy boom -– hydraulic fracturing of rock formation to extract oil and gas –- is largely market based.  Any time government builds a “false economy” without market-based prices and economic feasibility, it is going to lead to economic busts, widespread corruption and suffering. Sub-prime home purchase loans, redevelopment, green power and now sub-prime home-energy loans are examples of false economies made by government jobs programs.

Note: The author was a real estate appraiser for a large utility for 20 years. Prior to that, he was the coordinator, for a short time, of a large solar hot water heating project for all public housing in Los Angeles County.