Micheal Giberson over at Knowledge Problem bounced off my article on why PACE financing would be unlikely to damage the mortgage market to mention several of his own worries about how such programs are implemented.
He and I are in agreement that there’s little wrong with PACE programs in principle, but they raise some thorny issues in practice. Here are a few of his worries. Micheal says:
If PACE is just a way for homeowners to scrape up subsidies – i.e. to improve their properties and make their neighbors’ pay for it – then I’m against it.
I agree, but with a caveat: one justification for subsidies for energy efficiency is that energy efficiency has positive externalities, and creates societal benefits. To the extent that energy efficiency subsidies are societal payments for societal benefits, there is no problem with using PACE to scoop up as many as possible. In fact, it should be encouraged.
Here are some of the societal benefits of energy efficiency:
- Lower energy consumption reduced the need to build and upgrade energy infrastructure, a cost which is borne by all.
- Lower greenhouse gas emissions.
- Predictable energy bills reduce bankruptcies and foreclosures, lessening the need for social services and raising property prices.
- Less money spent on energy assistance programs.
- Local jobs from the economic multiplier when money is not spent on fossil fuels imported from outside the region.
- Reduction in local air pollution from local power plants.
- Lower water use in electricity generation.
- Lower energy prices because of reduced energy demand.
- More total jobs because energy efficiency improvements tend to be more labor-intensive than capital-intensive energy production.
Micheal goes on to say:
If my local government was proposing such a program, I’d worry that mismanagement would lead to future obligations for non-participating taxpayers. What is the mechanism that ensures civil servants will be effective loan officers? Will they get bonuses for doing good work or just be paid the same salary and promoted on schedule whether or not the loans they approved achieve intended results?
I agree with Micheal on this one, but this all depends on the particular implementation, although I just finished reading Micheal Lewis’s excellent book The Big Short: Inside the Doomsday Machine
on the Wall Street’s role in the subprime mortgage meltdown, and so I’m compelled to point out that civil servants would be hard pressed to do a worse job extending loans to unqualified buyers than any of dozens of mortgage lenders from 2005 to 2008.
Maybe the more interesting question is how and why the retail energy and home mortgage marketplaces became so bollixed up that a municipal-government-sponsored home-improvement-lending tax authority work-around is seen as a promising way to help consumers make sensible energy-related improvements to their homes.
Now that’s a great question. If you want to know why the mortgage market is so messed up, I highly recommend The Big Short, a book that makes highly technical subjects easy to understand. I can say that because I had to learn exactly how CDS’s on CDO’s work in order to pass my Chartered Financial Analyst exams, and I wish this book had been around back then… it would have made the task much simpler.
As for why the energy market is bollixed up, I think it has to do with lack of just about everything that improves market efficiency. The consumer energy market has limited price transparency, a lack of price information and real-time pricing, a single monopoly supplier, a lack of knowledge on the part of the consumer, regulated prices, a cost-plus pricing model for most suppliers, and subsidies for the purchase of energy for many classes of customers. With all this going against it, it’s no surprise at all that the market is so dysfunctional that civil servants as loan officers starts to sound like a good idea.