Can Energy Improvements Keep Me from Refinancing My Home?

Dear Liz,

Current mortgage rates in California have dropped very low and I want to refinance my property. I have excellent credit and there is still quite a bit of equity in my home. But when I went to my local bank, I was told that I won't be able to refinance (or probably even sell!) because I participated in a plan that let me add solar panels to my home. Why should this make my place impossible to refinance? Will all lenders refuse to refinance me?

Sam in San Diego

Dear Sam,

I think what you are having a problem with is a Fannie Mae and Freddie Mac policy. They buy most of the mortgages being underwritten today, and many lenders will not fund a home loan that doesn't meet their guidelines. The monkey wrench in refinancing your home is this--when you participate in the solar panel program (called Property Assessed Clean Energy [PACE]), you get a government loan for improvements that is repaid over twenty years when you pay your property taxes. The idea is that you only pay for the improvement while you own the property; then the next person to buy your home pays as long as he or she owns it. It's a way to buy solar energy and other energy-saving improvements without having to worry about living in the property long enough to recoup your investment.

But when you enroll in such a program, there is a lien against the property until the loan is repaid, and because it's a government lien, it is positioned first, ahead of any refinance mortgage you would like to take out. Fannie and Freddie refuse to take second position, because if you were to default, they would only get paid after the government. They refuse to take that risk.

With more than 20 states implementing some form of PACE program, this spells big problems. Since May, when this policy went into effect, lenders have told PACE program participants that their energy loan must be paid off completely before the property can be remortgaged--either as part of a refinance or sale. Some localities have suspended their energy programs until this shakes out.

However, there might be a solution very soon. On July 2, Energy and Commerce Committee Chairman, Howard Waxman, and Financial Services Committee Chairman, Barney Frank, told the housing finance agency to provide a plan to resolve this problem by July 12.

In the meanwhile, there are institutions that hold their own loans and do not sell them to Fannie Mae or Freddie Mac. Given your solid equity position and excellent credit, you'd be a good candidate for these lenders. You could also consider an FHA mortgage; the downside of an FHA loan is that you'd pay an upfront mortgage insurance premium even though you have equity. The upside is that FHA loans are assumable, which might help you sell your home faster and get a better price in the future. Current mortgage rates are so good, I can see why you'd want to act quickly.