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Around the country, many local governments are encouraging homeowners and businesses to cut their energy usage. The governments have been providing loans that pay for energy-efficient furnaces and solar heating systems. The program called PACE has the backing of the White House. It allows property owners to pay off these loans through an additional assessment of their property taxes.

But the federal agency that oversees mortgage giants Fannie Mae and Freddie Mac has slammed the door on the program, saying it poses a risk to mortgage lenders.

John McChesney reports.

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JOHN MCCHESNEY: On a broad rooftop in Santa Rosa, California, workers are installing a large array of solar panels - over 200 of them. The $300,000 project was financed by the county under a PACE program called Sonoma County Energy Independence.

Arnie Carston is the owner of ProSource Flooring, where the installation is underway.

Mr. ARNIE CARSTON (Owner, ProSource Flooring): We hopefully will make enough energy to take care of all of our needs.

MCCHESNEY: Carston, who makes a point of saying he's a Republican, is a strong supporter of the county program.

Mr. CARSTON: The main reason that I wanted to do this is that somebody doesn't have to pump a couple thousand gallons of oil out of the ground to make electricity to run my building.

MCCHESNEY: But a ruling by the Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac, has cast doubt on Sonoma County's 18-month-old program, as well as PACE programs in other states. Arnie Carston says he just can't understand why the agency has pulled the rug from under the program.

Mr. CARSTON: It's not doing anything except, you know, I think, making America stronger, if we all did this. You know, and for the government to come in now and say that you can't do this is kind of a - it's a surprise to me that someone, you know, hasn't thought this out.

MCCHESNEY: Sonoma County has loaned out $30 million for energy improvements to over a thousand homes and businesses since the program began a year and a half ago. And now that Fannie Mae and Freddie Mac have been told by their regulators to steer clear of the program, some contractors, like John Sutter, are being forced to cut back.

Mr. JOHN SUTTER (Contractor): I'd have to lay off about half my workforce of 15 employees right at this time. Just at the point we're actually gearing up to increase our workforce, I'm laying off.

MCCHESNEY: So, what is it about these programs that the FHFA doesn't like? The primary objection is that in the event of a default, the new tax obligation takes priority over the original mortgage. Program supporters pooh-pooh that objection, saying that the lender would only have to pay off any back property taxes - a small fraction of the total amount.

Not true, says Edward DeMarco, the head of FHFA.

Mr. EDWARD DEMARCO (Director, FHFA): It is not just what is the unpaid, accrued amount on the PACE assessment. It goes to what can be realized as the value from this property in a foreclosure sale.

MCCHESNEY: In other words, what if prospective buyers don't like that additional property tax and demand a lower price? The mortgage lender eats the loss. That won't happen, PACE supporters argue, because the house has increased in value.

Terry Kelley sealed and insulated his house in Sebastopol using $20,000 of county money.

Mr. TERRY KELLEY: We've found that it has made a huge difference in our winter utility bills. Our gas usage dropped by half.

MCCHESNEY: And that, says Kelley, makes his house more valuable.

PACE supporters argue that these programs work just like other tax assessments, like the ones for sidewalks and sewers and streets. They serve a community good by using sustainable energy and reducing greenhouse gases. Apples and oranges, says FHFA's Edward DeMarco.

Mr. DEMARCO: Well, I can leave it to your listeners to decide whether an individual homeowner making a decision on their own to do some sort of energy retrofit just to their property is akin to improving the sewers network in an entire neighborhood or community or not.

MCCHESNEY: DeMarco says his agency is talking with members of Congress who have introduced legislation to save the program. Meanwhile, California Attorney General Jerry Brown has sued FHFA over the issue, and Sonoma County has elected to continue its program, in spite of far fewer lenders able to participate.

For NPR News, I'm John McChesney in Santa Rosa, California.

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