photo: Sungevity

I wrote this post for Grist, where it first appeared.

On Tuesday, the Federal Housing Finance Agency effectively shut down an innovative green financing program called Property Assessed Clean Energy, or PACE, by restricting the ability of homeowners to take out loans to install solar panels and make other energy efficiency improvements.

Now the United States Treasury Department has piled on. A new Treasury directive tells the nation’s banks how to enforce the FHFA rules. The move could pose new problems for homeowners who have PACE loans, and complicate efforts to get the program back on track.

Homeowners repay PACE loans through an annual assessment on their property taxes. On Tuesday, the Treasury Department told banks that if a homeowner has a home equity line of credit, the amount of money available should be lowered to account for the loan liability. The Treasury also said homeowners could be required to put their PACE payments in an escrow account.

After Fannie Mae and Freddie Mac, the government chartered mortgage finance giants, raised concerns about PACE in May, some lenders declined to refinance mortgages that carried PACE liens.

Owners of commercial properties who hold PACE loans may need to put up additional collateral to back up the loan, according to the Treasury Department letter.

Cisco DeVries, president of Renewable Funding, an Oakland, Calif., company that designs and administers PACE programs for local governments, said he wants to make sure PACE loans for commercial owners won’t be curtailed.

“We believe PACE commercial can go ahead as it has always required lender consent when a commercial mortgage is in place,” he wrote in an email. “We just want to make sure we don’t run into an unexpected problem as we move forward.”

Some municipalities sell bonds to finance energy-efficiency loans for homeowners. But they may find that harder to do under the Treasury Department directive, which warned banks to move cautiously when underwriting such bonds.

I reported in the The New York Times on Tuesday that the Federal Housing Finance Agency had rejected the Obama administration’s offer of a two-year guarantee against any PACE-related mortgage losses Fannie or Freddie might suffer.

Now in a move that PACE proponents say adds insult to injury, the Treasury Department is advising banks to get local governments to insure them against any losses from the program if homeowners default on their mortgages.

Among those not amused by the FHFA action was California Gov. Arnold Schwarzenegger.

“The FHFA’s bureaucratic breakdown threatens one of California’s most promising new engines of job creation in this struggling economy,” Schwarzenegger said in a statement. “FHFA’s action threatens thousands of new sustainable jobs in California, especially in the hard-hit construction industry, while denying homeowners the opportunity to reduce monthly energy costs and add equity to their homes.”