Environmental professionals who specialize in helping consumers improve their homes' energy efficiency say credit unions have an opportunity to step into a growing market in green finance.
"This could be such a good market niche for credit unions to fill," said Jason Holstine, the owner and founder of Amicus Green Building Center, an environmental supply retailer and consultancy headquartered in Kensington, Md., just outside Washington D.C.
"This kind of lending is local by definition," he said. "It strengthens communities, lowers utility costs and saves consumers money. It's perfect for local financial institutions like credit unions or community banks."
Holstine and other environmental consultants said the green lending market opportunity has arisen as the short comings in a federal program designed to fund these sorts of environmentally motivated home improvements, called the Property Assessed Clean Energy program, have become more evident.
The Obama administration unveiled the PACE program in 2008. PACE provided loans for things like solar panels or new environmentally graded windows, and it allowed homeowners to repay the money over many years through surcharges on property tax bills. Further, since the repayment mechanism was through property taxes, the obligation to repay remained with the house and not the borrower. If the borrower sold the house before the environmental improvement was completely paid for, the obligation to pay moved to the next property owner. Also, program advocates pointed it that it would improve the home improvement industry and perhaps lead to bonds backed by PACE loans.
But an unforeseen bug quickly became apparent as the program got underway. The PACE loans took the first-lien position on the improved property, meaning that if the borrower or some future owner of the improved property went into foreclosure, mortgage lenders would take a back seat on the repayment.
This effectively made the PACE loans into almost a toxic badge as far as mortgage lenders were concerned and that meant having one attached to a property made it almost certain that a potential buyer would have a great deal of trouble arranging financing for the purchase. And if that were not enough, Fannie Mae and Freddie Mac virtually drove the program into the ground in May when they announced to lenders that they would not buy loans mortgages that are subordinate to other loans, meaning that if a lender granted a mortgage on a home with an existing PACE loan, the lender would not to be able to sell it into the secondary market. Fannie and Freddie's announcement effectively killed the program for those who planned to sell their homes before they paid off the entire improvement bill.
PACE even drew a cautionary note from the NCUA. "In an effort to advance public policy objectives relative to the environment, many states offer PACE loan programs to encourage owners to make building improvements that will increase energy efficiency. Under many programs, PACE loans receive status as a priority lien over previously existing mortgages," NCUA wrote in July 2010. "The Federal Housing Finance Agency issued a statement on July 6, 2010 cautioning lenders of the potential for certain PACE loan programs to adversely affect a lender's security interest in collateral securing residential and commercial mortgages," the agency added.
"I think this kind of lending is very important and still needs to happen," said Charles Schwartz, co-founder of LI Green, a nonprofit environmental and sustainable energy consultancy headquartered at a research park affiliated with the State University of New York's Stony Brook Campus. "The PACE program was not the best way to approach it, but now that it's gone we need to see what we can do to replace it."
Schwartz' consultancy has worked closely with the $3.8 billion Bethpage Federal Credit Union to set up its green lending program. The Bethpage program offers home equity lines of credit, fixed-rate home equity loans and an unsecured loan product to members who work with LI Green to improve the energy sustainability of their homes. The loans have caps on their origination fees, lower interest rates and higher debt-to-income ratios than do similar, general loans.
Schwartz, whose group has a goal of having 50% of homes on Long Island save at least 25% on their utility bills within six years, explained the loan program sought to make loans available at as many points on the environmental improvement scale as possible.
Some people will need a smaller loan, maybe unsecured, in the $5,000 to $8,000 range to make their homes more energy efficient, Schwartz explained. While other people might be ready for the bigger commitment, say $50,000 to add solar panels to the roof, he said.
Both Schwartz and Holstine stressed that it would be important for a credit union to work with a consultant or nonprofit organization on the loans, both to help members avoid scams and also to help make certain that materials and changes purchased with the loans are actually meant to improve energy performance.
This is sometimes controversial, and Schwartz acknowledged facing objections when LI Green required that homeowners buying solar panels also spend money to insulate their attics.
"We just couldn't see the sense in providing someone a subsidized loan for $50,000 to put solar panels on their roof if they weren't going to spend $3,000 to put insulation in their attic," Schwartz said.
While Schwartz and Bethpage have focused on the renovation or reconstruction aspect of green lending, the $21 billion State Employees' Credit Union, headquartered in Raleigh, N.C., has been making green mortgages.
Since 2008, SECU members who purchase or build a home that qualifies for an Energy Star certificate from the U.S. Department of Energy and the U.S. Environmental Protection Agency receive loans with lower origination fees, low fixed rates and flexible underwriting, according to Spencer Scarboro, senior vice president for mortgage originations for SECU.
"We cap our loan origination fees at $350," Scarboro said, "when we usually charge between 0.75% and 1%, and we have a more relaxed stance on debt-to-income ratios." Scarboro said the credit union had relaxed the ratio for these loans because of demonstrated evidence that a borrower's expenses in the new home will be significantly less than if they had not bought an Energy Star certified home.
Since 2008, Scarboro said SECU had made roughly 100 of the green mortgages, worth roughly $27 million. About 66% of the loans have been for homes that builders have built and about 33% to borrowers who were building an Energy Star home.
Scarboro said the credit union had not marketed the program other than including it in its general mortgage marketing. He speculated that the number of loans had suffered from the overall depressed market for new homes.
He also reported that SECU makes second-mortgage loans of up to $50,000 for people making sustainable energy improvements to their homes. Borrowers have to agree that 75% of the loan amounts go toward sustainable energy and other green improvements. The credit union has faced the problem of finding a standard for which windows or which appliances or which changes are actually energy sustainable.
"With the new home program it's been pretty easy," Scarboro said. "If you have an Energy Star certificate, you qualify. But it's more difficult on the home improvement side."
The $158 million Holy Rosary Credit Union in Rochester, N.H., has confronted the challenge of standards by partnering with a cooperative of stores that provide certified solar power products. Shoppers in the stores or the cooperative's website find that Holy Rosary provides low-rate fixed home equity loans to finance the solar power systems the cooperative sells.