Keystone HELP

Pennsylvania’s deputy treasurer, Keith Welks, was looking for a prudent investment for the state treasury, one that would earn money for the state and provide an additional benefit to Pennsylvania homeowners. That search launched the Keystone Home Energy Loan Program (HELP), which has made more than 11,000 loans for residential energy conservation improvements and trained more than 1,600 contractors since 2005.

At the time, AFC First Financial Corporation and West Penn Sustainable Power had been offering unsecured energy efficiency loans to western Pennsylvania homeowners for about 7 years when Welks got the idea to call AFC’s chairman, Peter Krajsa. The state treasury was willing to commit $20 million to expand Krajsa’s program statewide and rename it Keystone HELP.

Both Krajsa and Welks knew they had to win over contractors for the program to succeed. But from a contractor perspective, energy efficiency retrofits tended to be less lucrative than kitchen or bath remodels, and the concept of home performance was in its early stages. To engage these contractors, Krajsa launched the Green Energy Training Academy, where participants receive home performance training using a building-as-a-system approach and learn to sell Keystone HELP loans. The program screens contractors for ethical and financial stability, and once approved, they have the competitive advantage of being able to offer their customers a better lending rate than most banks.

According to Krajsa, the below-market rate loans, supported in part by federal stimulus funding, were so popular that his program started to run out of lending capital. The state treasury had already doubled its initial investment to $40 million and could not afford another sizeable investment.

But Keystone HELP had been generating a healthy return on investment, between 4% and 5% annually. Both Republicans and Democrats had supported the program because it had achieved the triple bottom line—economic, social, environmental—that the state treasury required for a prudent investment.

“We weren’t anywhere near exhausting the market for home improvement loans in Pennsylvania,” Welks recalled. “We had to find a solution for the fact that we would have placed all our cash into loans and had no more cash available.”

Having already made more than $30 million in loans, the treasury came up with a solution. “We began asking folks and learning that we weren’t going to be able to secure ties and issue a bond or series of bonds—that amount was too small,” Welks said. “But we were also hearing from people we respected that less sophisticated transactions that would have many of the same elements of that kind of securitization were possible.”

The state treasury found that it could bundle its Keystone HELP loans and sell them, freeing up capital to make new ones. Since the loans had performed so well, Welks reasoned, it would be relatively easy to sell them to secondary lenders, such as financial institutions or mutual funds. Potential buyers would be able to track the performance of the loans before purchasing them and, Welks said, get “excited about buying loans for energy efficiency because they have a better track record and have a greater social mission.” Meanwhile the treasury would free up assets to make more energy efficiency loans for Pennsylvania homeowners.

The first secondary-market sale was a success. In April, Fox Chase Bank, WSFS Bank, and National Penn Bank bought almost 4,700 Keystone HELP loans for $31.3 million in cash and deferred payments.

The sale demonstrated a powerful way to recapitalize, making Keystone HELP one of the first programs in the country to successfully develop a secondary market for energy efficiency loans. Before the sale, few investors were willing to part with their assets, instead holding out for a longer-term yield. “There were not that many people who were acquiring these kind of loans, aggregating them, and then selling them,” said Welks. “If no one else is going to do it, why don’t we try to do it?”

In addition to selling energy efficiency loans to secondary markets, Keystone HELP has stimulated Pennsylvania’s home performance industry. By leveraging its contractor network to offer point-of-sale financing, the program places the contractor at the center of the transaction with the homeowner, who enjoys the ease of being able to finance whole-house retrofits that deeply impact home energy performance.

Whole-house retrofits have increased from 10% to 20% over the life of Keystone HELP. And because these projects require a Building Performance Institute (BPI)-certified contractor, they generate demand for professionals with advanced home performance credentials. As more contractors obtain Home Performance with Energy Star certification, they are able to grow their business while helping homeowners make informed decisions to reduce their energy costs.

Keystone HELP not only benefits homeowners and contractors, Krajsa said, it also exemplifies a self-sustaining model for making energy efficiency desirable to private investors, who play a key role in the industry as federal stimulus funding dwindles. The program has been able to transcend politics, too, with state leaders in both parties embracing Keystone HELP and seeking ways to improve it.

Keystone HELP has shown that what is possible in Pennsylvania could be replicable across the country. Welks already has his sights set on “the next chapter”—national aggregation and securitization of energy efficiency loans: “[We’re] creating a more liquid asset that is recognized by investors as attractive and high-performing, thereby producing a lower cost of capital for borrowers.”