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. 

By Chriss Street

The American taxpayer is about to be saddled with another multi-billions bailout of subprime mortgage loan losses  from the stealth Federal Housing Authority lending program that has been offering ultra-low 3.5 percent down payments since 2009.  Delinquency rates are already at 9 percent in California and expanding rapidly across the United States.

Subprime lending drove the U.S. housing bubble from 1998 until its collapse beginning in 2007.  Since that time, real estate prices have fallen by 35 percent across the United States.  Subprime was first hailed for its expansion of the number of people who could qualify for a mortgage.  But many of those borrowers fudged on their income and net worth levels in order to borrow more than their true incomes would allow them to repay.

Since the bubble burst and many sub-prime borrowers defaulted, the U.S. government has provided bank bailouts, a deficit-spending stimulus that will double the national debt from $9 trillion in 2007 to $18 trillion next year.

A Rasmussen poll taken just after the recent JP Morgan Bank derivative fiasco reported that 71 percent of Americans say the government should let banks that get into financial trouble be required to fail.  Banks are still blamed for causing the housing crash by lowering traditional mortgage loan requirements of 20 percent down payment and a 680 FICO credit score.

Taxpayers liable

Unfortunately, taxpayers are about to learn they are increasingly liable for another multi-billion-dollar subprime bailout.  The U.S. Department of Housing and Urban Development website trumpets: “FHA Loans Help You.”  In smaller print, that help is described as insuring your loan so your lender can offer you mortgage down payments of 3.5 percent of the purchase price that includes closing costs and fees in the loan.  And the FHA will allow you to buy a home, remodel and refinance your existing home or convert your equity into cash through a reverse mortgage if you are 62 or older.

All this FHA hoopla sounds a lot like subprime lending, because it is subprime lending!

Any bank that made this type of loan on its own would be required by regulators to classify the loan as a non-conforming investment and reserve approximately 25 percent of the amount of the loan in cash as protection against a potential subprime borrower default.  But the beauty of the FHA insured loan program is that banks collect fees for the risk-free processing of loans, and then sell the loans to Federal National Mortgage Corporation (Fannie Mae) or The Federal Home Loan Mortgage Corporation (Freddie Mac) for another profit.

Of course, both of these government sponsored enterprises have been operating in conservatorship (nice word for bankruptcy) since September 6, 2008 as a result of subprime loan losses.  Then-Treasury Secretary Henry Paulson said the next day:

“I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.”

That correction has resulted in 5 million completed foreclosures and another 8 million mortgages that are more than 30 days delinquent or in foreclosure.

Down payments

The Center for Responsible Lending, founded by ACORN, recently published a study reporting that requiring a 20 percent down payment would prevent 60 percent of all FHA borrowers from qualifying for a residential mortgage.  To analyze what it would take for a typical FHA borrower to qualify for a traditional mortgage, CRL selected an average family household led by a police pfficer, a teacher and tirefighter.  Relying on the Department of Labor Occupational Employment wage scales, assuming the average family could dedicate half of their 5.2 percent average savings toward a down payment on a 6 percent loan for an average hous,.  CRL estimated the typical American family would have to save for 14 years to afford a traditional 20 percent down payment loan.

Real estate experts have warned for years about the potential dangers of FHA mortgages because the 1 percent loan fee, 0.5 percent insurance costs and 6 percent real estate sales commission are all rolled into a 3.5 percent down payment.  Lenders refer to this as “hiding of the pickle,” because the borrower already has 4 percent negative equity when the mortgage is funded.

Falling prices

As home prices have continued to fall since 2009, most FHA borrowers are now saddled with mortgages that are substantially greater than the fallen value of their homes.  Many of these FHA borrowers are public-sector police officers, teachers, firefighters and others who expected to enjoy lifetime employment.  But local governments have cut 482,000 jobs since the beginning of 2009 and public sector layoffs are accelerating in the nation’s weakest real estate markets of California, Florida, Illinois, New York, Texas and New Jersey.

The Obama administration’s Office of Management and Budget estimated in October 2011 that  FHA’s $4.7 billion capital reserves will be wiped out this year, forcing the FHA to seek at least $700 million bailout from the U.S. Treasury.  Americans are justifiably angry at being required to bailout the banks’ irresponsible subprime lending.  Think how angry they are going be this election season, when they have to bailout the government’s irresponsible subprime lending.

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Chriss Street’s latest book: “The Third Way,” now available on  www.amazon.com