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Fannie, Freddie Kill PACE Program

Fannie Mae and Freddie Mac have effectively killed the Property Assessed Clean Energy (PACE) program, which allows property owners to pay for the cost of energy improvements to their homes or businesses through an additional charge on their property tax, by refusing to accept loans on buildings in the program, according to several reports.

The program lends property owners money to make energy saving upgrades and then repay the loan through a 20 year scheme secured by a lien. The lien would take priority over a mortgage repayment in the event that an owner defaulted. The program is similar to the 37,000 other lien programs throughout the country that municipalities regularly use to fund infrastructure improvements such as sewers and sidewalks.

But Fannie and Freddie said in a letter Tuesday that the PACE program was not comparable to other liens due to their “unusual and difficult risk management challenges for lenders.” The agencies also said the loans associated with the program “do not have the traditional community benefits associated with taxing initiatives.”

The two agencies, which are the largest buyers and sellers of home loans in the country, informed lenders in May that they would not accept such loans. Due to the amount of leverage the two quasi-governmental organizations have in the mortgage market, the effect has effectively brought the PACE program to a halt. According to the New York Times, some lenders have already refused to refinance homes participating in the program.

U.S. Representatives Barney Frank and Henry Waxman had sent a letter to administration officials last Friday requesting urgent action on the issue. Meanwhile, Cisco Devries, the president of Renewable Energy, the company which administers the program, suggested litigation may be necessary to resolve the issue.

The PACE program had been expected to help grow the U.S. commercial business efficiency business to up to $5.6 billion a year. Property owners had been eligible for loans up to $50,000.

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2 thoughts on “Fannie, Freddie Kill PACE Program

  1. This is very bad news.

    Digging deeper, the NY Times reports that “the administration had been unable to persuade the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to accept mortgages with PACE liens”. I don’t know the relationship between the FHFA and the administration – but surely something can and should be done to override this extremely poor decision.

    Some comments about the actual FHFA letter:

    “First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors. The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives.” So cleaner air, reduced GHG emissions, and improved energy security, are not community benefits? And what exactly are the “unusual and difficult risk management challenges”? PACE can only be invoked when the additional debt service payments are less than the energy bill savings produced by the improvements – meaning that the homeowner will be even less likely to default since their cash flow situation is improved.

    “First liens for such loans represent a key alteration of traditional mortgage lending practice”. This statement is false. The routine tax assessments referred to above are all backed by senior liens.

    “They present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities …”. The only alteration in value is to increase property valuations, which actually decreases lender and secondary market risks.

    “They … are not essential for successful programs to spur energy conservation”. FHFA is in no position whatsoever to make such a claim. They have no energy conservation experience or expertise. They have no legislative or governing expertise either.

    “While the first lien position offered in most PACE programs minimizes credit risk for investors funding the programs …”. This statement directly contradicts both of their risk statements quoted above.

    “Underwriting for PACE programs results in collateral-based lending rather than lending based upon ability-to-pay, the absence of Truth-in-Lending Act and other consumer protections, and uncertainty as to whether the home improvements actually produce meaningful reductions in energy consumption”. Collateral-based lending is not inherently riskier or less desirable than ability-to-pay lending; and as noted above, the buyer ability to pay is actually increased under PACE. Furthermore, PACE underwriting manifestly does not result in uncertainty about energy use reductions – the funding mechanism has no relationship whatsoever to the technical details of the energy improvements themselves.

    “However, first liens that disrupt a fragile housing finance market and long-standing lending priorities …”. This quote makes it clear that the FHFA is objecting in part based on an apparent reluctance to change their hidebound ways. It is a reactionary bureaucratic response that blindly defends the status quo in lieu of being proactive and forward-thinking.

    “Further, nothing in these directions to the regulated entities affects in any way underwriting related to traditional tax programs, but is focused solely on senior lien PACE lending initiatives”. So the FHFA is uniquely objecting to PACE programs (a governmentally initiated and approved financing mechanism). Surely, that is unwarranted and illegal interference in local governance.

  2. THE FHA, FNM & FRE all make it clear in therier own commentary that these are assessments. They are trying to do what they can to slow something down until they figure out how they can profit from it somehow. PACE will survive & thrive!

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