On June 26, 2009, the House of Representatives passed the American Clean Energy and Security Act of 2009, commonly referred to as the Cap and Trade Bill. Critics of the bill charge that it will cost American jobs, raise taxes on individuals and prove ineffective in dealing with climate change. Congressional porkers also threw in many questionable provisions, such as $20 million appropriated for stove upgrades.
The most outrageous part of this bill, however, is section 286.
Section 286 proposes “additional credit for Fannie Mae and Freddie Mac housing goals for energy efficient and location efficient mortgages.” In effect, this section plans to give a more than 125 percent credit for government-backed mortgages to people with homes that comply with energy-efficiency regulations.
Fannie Mae and Freddie Mac partially caused the current recession by relaxing lending standards, allowing unqualified borrowers to receive mortgages and eventually default on them. Considering this history, it is unclear why the government would think it’s a good idea to lower the mortgage lending standards.
Defenders of Section 286 argue that not only does this mortgage credit help the environment but it will also lower energy costs for homeowners, allowing them to divert more money towards their mortgage. The problem with this argument is that it ignores two major facts about this situation.
First, energy costs are not a leading reason why people are delinquent on mortgage payments. A 2006 Freddie Mac survey found the three largest factors for mortgage delinquency were unemployment, health care expenditures, and personal debt. One could possibly categorize some energy costs as personal debt. Yet, even under the unrealistic assumption that all personal debt is a result of high energy costs, these delinquencies would still amount to merely a fraction of all delinquencies. Knowing this, it is not so farfetched to suggest that a mortgage provision would be more appropriate in one of the health care proposals rather than an energy bill.
Second, the United States already provides energy subsidies to the poor. Established in 1981, the Low Income Home Energy Assistance Program (LIHEAP) received $4.5 billion in block grants and $590 million in contingency funds in 2009 alone in order to help poorer Americans pay their energy bills. Through LIHEAP, taxpayers already subsidize the energy bills of many of the same people who would apply for better mortgages under the Cap and Trade Bill. The idea that their energy costs would go down is false—they do not pay market value for energy as it is.
We should not hesitate to question if Fannie Mae and Freddie Mac should be given more incentives to make mortgages. It was the lowering of standards at these two companies that compelled other firms to lower their rates in order to compete—all of this to a point where too many people defaulted on mortgages, sparking the severe economic recession we’re experiencing now. And while this was going on, former Fannie Mae CEO Franklin Raines took over $50 million in bonus compensation.
More shocking, the question of what qualifies as an environmentally friendly mortgage is not answered. One of the stated criteria for receiving the 125 percent credit for a mortgage is that the house in question “meets the energy efficiency standards under section 284(a) of the Green Resources for Energy Efficient Neighborhoods Act of 2009” (the GREEN Act). The D.C. Writeup looked into the GREEN Act and found two peculiar things: that act has yet to be passed and section 284(a) was not available to the public. The bill as posted on Congress’ website only has 28 sections. We called the House Energy & Commerce Committee and the House Financial Services Committee—neither could explain the discrepancy.
The goal of section 286 in reducing energy costs and helping the environment is very noble. However, trying to use a quasi-government agency which has proven harmful to the market in the past to incentivize green technologies and behaviors is bad economics.
The section should focus solely on reducing energy costs, not promoting home ownership. The bill could reduce energy costs by subsidizing energy efficient practices to get people off LIHEAP which would save money, energy, and the environment over time. Instead, the Democrats have once again pushed their economic agenda, while disguising it as environmentalism.
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