Don’t Put Eco-Finance Measures in Energy Bill

Cronyism and boondoggles in an energy bill is nothing new in the U.S. Congress. But this week, senators of both parties are taking the process to new lows in amendments they are offering to the pending S.2012—the Energy Policy Modernization Act.

Not only are these politicos picking winners and losers through subsidies and mandates favoring selected “green” industries and technologies, they are roping in housing and finance agencies into their “environmentally correct” schemes. At best, this would divert the agencies away from their missions at a time of great economic volatility. At worst, it could cause a financial crisis of its own.

First, there is an amendment from Sen Johnny Isakson (R-Ga.), a former real estate agent, which would loosen credit standards for “green” homes backed by taxpayers through the Federal Housing Administration. The FHA, created during Franklin D. Roosevelt’s New Deal in 1934 to help low- and middle-income borrowers obtain housing, now benefits many affluent borrowers as well by insuring from default mortgages up to a limit of about $625,000.

This greatly reduces a bank’s risk from making these loans, but can also create a substantial “moral hazard” because of the taxpayer backing. As I wrote in The Wall Street Journal in 2007, “FHA-insured loans have also been at the center of some of the worst excesses of the housing boom, including mortgage fraud, loans made without income verification, and property ‘flipping’ with inflated appraisal.” The FHA received a $1.7 billion taxpayer bailout in 2013.

Isakson’s amendment, backed strongly by the real estate lobby, would add to taxpayer risk by requiring the FHA to insure loans with a higher debt-to-income ratio based on “estimated energy savings.” It would also allow “estimated energy savings” to be added to the appraisal of the home, creating bigger loans for taxpayers to subsidize.

As Mark Calabria, director of financial regulation studies at the Cato Institute, writes, under the amendment, borrowers purchasing energy-efficient homes “would mostly likely leave the table with an LTV [loan-to-value ratio] over 100%, that is already underwater before they’ve even moved in.  Did Congress learn nothing from the crisis?”

Calabria adds that the amendment’s vague standards for what is “energy efficient” will also lead to inflated housing appraisals, which were a factor in the housing bust. And there is no need to boost appraisals for energy-efficient homes, he says, because “if indeed energy savings actually increased the value of the homes, that would be reflected in the price.” Calabria concludes, “Not only does this proposal weaken FHA standards, and expose the taxpayer to greater risk, it takes us further down the path of an already politicized housing policy, where instead of relying on market prices, values are dictated by Soviet-style bureaucratic guesswork.”

“Soviet-style bureaucratic guesswork” could also describe the results of an amendment put forth by Sen. Jack Reed (D-R.I.). Reed’s measure would have the Securities and Exchange Commission—charged with investor protect ion—mandate that publicly-traded companies include United Nations-endorsed measures of “carbon risk” and “climate friendliness” in annual reports to shareholders.

Public firms are already required to list in the “risk factors” of their annual report both the risks of climate change and the threat of related legislation and regulation if it will impact the company’s bottom line. In 2010, the SEC issued disclosure guidance stating that climate risks must be discloses when they could have a “material” effect on earnings.

But Reed’s amendment calls for the SEC to specifically adopt the measures advocated in “Climate Strategies and Metrics,” a manifesto put forth by the World Resources Institute and the United Nations Environment Program Finance Initiative. This document says companies should be required to put down specific numbers for “carbon footprinting” and “green/brown metrics.” Needless to say these measures are arbitrary, and hard to determine with a specific number.

But that’s what green activists and a whole industry of environmental corporate auditors are counting on. If firms’ estimates somehow don’t jibe with what is determined to be the “right” number, they could be fined or browbeaten until they capitulate to what the agencies and activists want.

Needless to say, investors would lose out as companies would have to divert resources to compliance with these mandates, on top of the horrific regulations from corporate “reforms” such as Sarbanes-Oxley and Dodd-Frank. One consequence would be that this would simply accelerate the trend of companies leaving or staying off of the public markets, and ordinary investors will lose out on options to boost their portfolio with profitable companies.

Members of Congress, especially those who claim to be fiscally conservative, should take heed of the blow against cronyism  that took place this week when an avowed opponent of ethanol mandates and subsidies won the Iowa GOP caucus. Eco-cronyism isn’t just bad policy. Increasingly, it is also bad politics.