A battle is brewing over the best way to finance the retrofitting of homes to make them more energy efficient.

The outcome could make or break the fledgling industry of administrators for Property Assessed Clean Energy programs, which are funded by local governments and repaid via annual assessments on owners' property tax bills.

It has particular relevance in California, home to some of the nation's most expensive housing markets. Since 2010 dozens of counties and municipalities in the Inland Empire, an area of five million residents stretching from Riverdale to San Bernardino, have made hundreds of millions of dollars of energy efficiency loans. The municipal bonds that finance this lending are themselves bundled into collateral for asset-backed securities, providing Wall Street with a relatively high-yielding investment product that can be marketed as "environmentally friendly."

Without buy-in from the primary trade group for mortgage lenders and investors, however, this financing may not be easy to obtain.

"It's lenders and servicers, and particularly the secondary market, that in the end will dictate the success or failure" of FHA funding for properties with PACE liens, said Richard Andreano, a partner in the law firm Ballard Spahr's mortgage banking group.

"It's a classic government move, addressing one side of an equation and forgetting the other side. When you do that, you don't always get the result you want. That's why [the government-sponsored enterprises] had to revise HAMP and HARP," he said, referring to two federal programs designed to help struggling homeowners, the Home Affordable Modification Program and Home Affordable Refinance Program.