SONOMA COUNTY – The Sonoma County Energy Independence Program has set a new ceiling on how much debt homeowners can hold when they seek to participate in the energy-improvement loan program.

Reacting to federal rules and the demands of bond market financing, SCEIP ruled that homeowners cannot owe more than 110 percent of the market or assessed value of their homes, including energy program loans, to qualify for the program.

"We did it reluctantly," said Amy Bolten, spokeswoman for the Sonoma County Water Agency and one of the primary leaders behind the program. "We started the program with $100 million" put up by the county of Sonoma and the Sonoma County Water Agency, she said. "We already have $40 million worth of requests."

Now the program needs to turn to the bond market for financing, she said.

"And the bond markets won't buy under-water properties," she said.

Solar contractors in Sonoma County reacted with surprise to the change.

"It was a sudden and extreme change," said Nate Gulbransen, president of Westcoast Solar Energy in Rohnert Park. Solar projects, he said, are the hardest hit by the ruling because they are the most costly of energy upgrades.

"About a month and a half of scheduled work suddenly evaporated, idling our workers. Our permitting time was lost, and we have material sitting unused in warehouses," he said.

SCEIP advances funds for the installation of energy-saving upgrades to homes and businesses, allowing property owners to pay off the loan gradually through assessments to their property taxes.

At the end of 2009, nearly a third of Sonoma County homeowners with mortgages were under water – owing more on their mortgages than their homes' assessed value, according to a new report by First American CoreLogic. Another 4,400 county homeowners were said to be in "near-negative equity."

Some under-water properties have almost certainly already been funded by SCEIP, said Ms. Bolten.

"One of the wonderful things about the program was that it allowed homeowners with a strong commitment to holding onto and improving their property an opportunity to replace a furnace or a roof," said Ms. Bolten.

In October of last year, the White House released a policy framework for Property Assessed Clean Energy that stated, "PACE programs should require a current estimate of appraised value, and outstanding property-based debt cannot be [more] than the value of the property."

SCEIP set the cap at 110 percent rather than the 100 percent implicit in the federal guidelines to give mortgage holders a little extra leeway, said Ms. Bolten.

According to Sonoma County Auditor, Controller, Treasurer and Tax Collector Rod Dole, property is appraised by comparing the county assessed value to the market value given the property by Zillow.com (an online real estate service where users find and share information about homes) and taking the higher figure.

"A third option is for the owner to have the property appraised. We check the figure for validity and take that into consideration as well," said Mr. Dole.

Mr. Gulbransen believes SCEIP should set up a review process for certain properties that have been in a family for a long time, high-end properties where the assessment is clearly out of date and properties where the SCEIP loan is the cause of going under water.

"I can understand not wanting to create bad debt. But dollar for dollar solar increases financial value more than any other home improvement," he said.

Eric Theriot of Sequoia Solar in Santa Rosa said his team lost about four or five deals during the last week.

"But we got four new ones this week. We're still busy. ... I don't blame SCEIP for making the change," he said.

Other contractors were surprised it took as long as it did.

"I've been talking to people, and it looks like one in four property owners that SCEIP funded should have been disqualified," said Keith Kruetzfeldt of Solar Universe in Santa Rosa.

"They should have had the cap from the beginning. Short term it hurt us, but long term it's the right decision so that SCEIP can continue to fund the program," he said.

Mr. Gulbransen agrees.

"They were too lenient in the beginning in order to sell SCEIP to the voters. Now they're too restrictive. But in the end sustainability is what we're all after. That's what creates the jobs," he said.