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. 

13 comments

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  1. Rex The Wonder Dog!
    Rex The Wonder Dog! 24 May, 2012, 10:28

    More boondoggle mistakes waiting to bring us more billion dollar shortfalls and more tax hikes, and more over comped gov employees……please tell me when this lunatic spending will end.

    Reply this comment
  2. Beelzebub
    Beelzebub 24 May, 2012, 10:29

    You must understand something.

    The only way they can grow the economy these days in by the fraudulent means of blowing economic bubbles. Whatever growth you have seen in the economy in the last 15 years has been through pulling demand forward, blowing economic bubbles and government bailouts. Otherwise our GDP would’ve averaged in the NEGATIVE NUMBERS for the last 15 years. That is the truth. But when you load the resulting debt on the back end sooner or later that must clear. But you and I know it won’t. It will only grow until the economy and the investment markets blow sky high.

    The energy sub-prime loans are no different. They were devised to cover up the bigger problem and foment FALSE ECONOMIC GROWTH!

    The system is being gamed and the average american is either too stupid to figure it out – or has his hand deep in the grab bag and whose surival is DEPENDENT on the financial scam.

    There is some more truth for ya! 😀

    Reply this comment
  3. Dyspeptic
    Dyspeptic 24 May, 2012, 12:09

    Gary Schilling’s prediction that housing prices will fall another 20% this year is depressing as hell. Where is the bottom here? We have been in an economic freefall for 4 years now and still no end in sight. At least the Greeks can leave the European Monetary Union and pay off their bankster creditors (JP Morgan?) with worthless drachma’s. California doesn’t have that option.

    Hey B’bub, speaking of JP Morgan, I was just watching a Frontline video over at ZeroHedge about the MF Global crackup. A commodities trader interviewed for the program commented that he new exactly where the “missing” client account funds ended up. They went to JP Morgan to cover margin calls from Corzine’s bad bets on internal repo trades. When Corzine was asked about that during his congressional testimony the lying skunk plead ignorance and said no one knew what happened to the $1.5 billion. Shazzam, it just dissapeared. Right into JP Morgans coffers.

    The video also shows that Jon Corzine personally and successfully lobbied The Commodities and Futures Trading Commission not to outlaw internal repo trades. Incidents like that are why I don’t trust regulators or regulations. After all, it’s just a revolving door scheme where this years regulators become next years lobbyist’s. Sarbanes-Oxley and Dodd-Frank didn’t stop MF Global from disaster and they won’t stop the inevitable system wide crack-up either.

    Reply this comment
  4. Beelzebub
    Beelzebub 24 May, 2012, 12:19

    “Where is the bottom here?”

    You will see the bottom when the bond markets blow sky high.

    And if you are in your early 60’s and life a normal lifespan you will see it before you go to the other side.

    “When Corzine was asked about that during his congressional testimony the lying skunk plead ignorance and said no one knew what happened to the $1.5 billion. Shazzam, it just dissapeared. Right into JP Morgans coffers”

    Yeah, I heard about that Frontline broadcast on PBS but I missed it. I’m certain they have it on-line now so I will watch the replay. PBS is about the only selectively honest news network we have left in America. You would never see this on NBC, CBS, ABC, FOX, MSNBC or CNN. They rely on bank loans to remain in business. PBS is funded largely through public donations. Same as all the mainstream newspapers. All bought and paid for.

    The government has really done NOTHING to prevent what took place in 2007-08. In fact, they’ve made it worse by backstopping the biggest Too Big To Fails and making them even BIGGER than they were 5 years ago! Why have they done nothing??? BECAUSE THE FINANCIAL OLIGARCHS OWN THEM!!! THAT’S WHY!!!!

    Reply this comment
  5. Hondo
    Hondo 24 May, 2012, 13:04

    I’m in the real estate business. We know that new windows in our old buildings would take a decade or more to pay off the price of the windows, and that’s with us doing the installing. Not the inflated union goon salaries.
    The notion of Obama rigging the appraisals to a higher level is criminal. It doesn’t matter how high a false appraisal a house gets, it will only sell at a market price (unless the government buys it. Is that where we are going with this?). And in a depressed state like Kalifornia, that ain’t going up any time soon. The Democrats are making all the same mistakes that led to the bad state our country is in now.
    Who hired these guys anyways?
    Hondo

    Reply this comment
  6. Beelzebub
    Beelzebub 24 May, 2012, 14:57

    Here, folks. Learn about John Corzine and the collapse of MF Global. It’s only about 20 minutes of your time and well worth it.

    Corzine = Friend of Obama

    You got friends in high places? No worries.

    Has anything changed on Wall Street since 2007-08? NOPE! It’s business as usual.

    This is why it’s all destined to collapse.

    Those who tell you we need less regulation on Wall Street – not more – are full of it.

    http://www.pbs.org/wgbh/pages/frontline/mf-global-six-billion-dollar-bet/

    Reply this comment
  7. Wayne Lusvardi
    Wayne Lusvardi 24 May, 2012, 15:18

    Over $200 Million Spent On Weatherization And Job Training But With Little To Show For It. “California was awarded $186 million in federal stimulus money to weatherize homes. So far, the program has created the equivalent of only 538 full-time jobs. A $59 million effort to train people for green jobs in California produced only 719 job placements.” (David Brooks, “Where The Jobs Aren’t,” The New York Times, 9/5/11)

    Reply this comment
  8. Beelzebub
    Beelzebub 24 May, 2012, 15:32

    Oh well. What the hell. Easy come, easy go. I think they ought to bring back snake oil and sell it by the quart at the big box stores. Tell everyone it will heal everything from cancor sores to low self-esteem! heh. Try to get Dr. Oz or Dr. Phil push it on their weekday shows. Negotiate with Oprah to write a book on it. Whatever it takes to grow the economy! ANYTHING GOES TO BOOST GDP!!!! HAH! 😀

    Reply this comment
  9. Beelzebub
    Beelzebub 24 May, 2012, 21:37

    Now there are strong rumors that the reported $2B JP Morgan loss could easily go over $7B. Big surprise, eh??? heh. Their positions are still open and rumor has it that if they close out the losses could go ballistic. heh. Nah, we don’t need more regulations. Heck, the free market will solve everything. JPM has lost a quarter of it’s stock price in the last few months. Just waiting to hear that magic ‘bailout’ word again. Call it the “B” word. heh. Bring in John Corzine. Let him straighten out the problem. heh. Account holders – stick you head between your legs and pray for divine intervention! heh. 😉

    Reply this comment
  10. Beelzebub
    Beelzebub 25 May, 2012, 09:56

    Less than 2 months ago JP Morgan stock was near $47 a share.

    Today it’s under $34 and falling like a rock.

    People are speculating that the losses could run $20-$30B. heh.

    Ripe for another taxpayer bailout.

    Come to the Wall Street Casino – where the PLAYERS NEVER LOSE!!! HAH! 😀

    Reply this comment
  11. Beelzebub
    Beelzebub 25 May, 2012, 16:10

    JPM stock down another 1.40% again today. heh heh.

    I’m free….freefalling.

    Bailout coming eventually.

    Reply this comment
  12. PJ
    PJ 26 May, 2012, 10:58

    Went to buy paint yesterday; can’t buy evil oil-based paint in SoCal anymore.
    Wanted to install pot lights in the living room; can’t install them anymore without following a bajillion new regs.
    Bought a new dishwasher; doesn’t clean, runs for hours, is “energy efficient.”
    Installed central air and heat in old house; didn’t pull permit or would face thousands in required upgrades.

    We live in the Soviet Union!

    Reply this comment

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