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Agency says it won't take mortgages with assessments in senior spot; officials cry foulSONOMA COUNTY -- A flurry of letters between county, state and federal officials has so far failed to clear up a glitch that could curtail building energy improvement programs such as the Sonoma County Energy Independence Program.

In May, Fannie Mae and Freddie Mac, the federal agencies that buy more than 70 percent of new home loans from lenders, issued an ominous guidance stating they won't accept property loans with an energy independence assessment.

"It's a worrisome development," said Sonoma County Treasurer and Tax Collector Rod Dole, one of the founders of the SCEIP program. "As the first county-wide energy independence program in the U.S. and a model for other cities and counties, we're doing our best to get beyond it."

A letter addressed to Fannie Mae Single Family Sellers and Servicers said that "government-sponsored energy loans" with senior lien status to a mortgage are prohibited under security terms.

The letter followed assurances last fall by the Federal Housing Finance Agency to Sonoma County and the state Attorney General that Fannie Mae and Freddie Mac were supportive of energy-efficiency programs and that best practices were being established.

As a result of the May 5 letter, several property-assessed clean energy programs have been suspended, although SCEIP has not.

The programs, administrated by assessment districts created for the purpose, advance funds for the installation of energy-saving upgrades to homes and businesses, allowing property owners to pay off the upgrade costs gradually through assessments to their property tax.

In the case of SCEIP, the initial loans come from a combination of county seed money and the sale of bonds.

"The problem seems to be Fannie Mae's and Freddie Mac's confusing a tax assessment with a loan," said Mr. Dole.

All tax assessments – for improving roads, schools, water systems – have senior lien status, meaning in case of default they are the first to be paid off.

"Why Fannie Mae should have hit upon this one, after not objecting to any others, is what we can't explain," he said.

Letters have gone off from his office, from the California Attorney General, Sen. Barbara Boxer and Rep. Mike Thompson asking for clarification and reassurance from the Federal Housing Finance Agency.

In response, the FHFA cited concerns with three key areas: the absence of consistent and complete underwriting guidelines that protect homeowners, lenders and potential investors; the need for energy retrofit standards and metrics for energy loan programs; and perhaps most importantly, the risks posed by the first lien status permitted in several state programs like California.

The letter, in response to a query from Placer County, which launched a program in March, went on to acknowledge support for the programs by the Council for Environmental Quality and other federal agencies, but "... to date [our] efforts have not produced a comprehensive set of guidelines."

Meanwhile, the loan guidance is causing damage. Already, one lender, a national bank with a local office, has refused to service a loan for the purchase of a property with a SCEIP assessment.

"We were ready to step in, but the buyer and seller negotiated an agreement where the assessment was paid off," said Mr. Dole, who worries that lender reluctance to accept the assessment as part of the property could undermine the entire national program.

"We reacted quickly and checked with other lenders, but so far none of them have taken the same position," he said.

Nationally, more than $100 million in federal funds has been allocated to support the initial phase of energy loan programs.

Sonoma County has already disbursed nearly $30 million as part of the program, with requests for about $45 million more in the application process. Half-a-dozen new solar installers have started up or opened branches in the county as a result of the program.

SCEIP suffered another setback in October when worries in the bond market led to the announcement that homeowners owing 110 percent or more of the value of their property would not be eligible for funding.

Solar installers reported about a 30 percent loss in orders from underwater property owners but expected to make up the difference without too much delay because of demand.

"SCEIP is a work in progress," said Mr. Dole. "Initially we wrestled with questions of how to finance the program, what to do in case of default, the legalities of the process. One by one we put those issues to bed. This one involves the federal government, which makes it more difficult to resolve."