For the last two months, energy auditors, energy efficiency experts, solar installers, and homeowners have been waiting and clamoring for more guidance from Fannie Mae and Freddie Mac. It was in May that Fannie Mae and Freddie Mac abruptly and without justification changed their policy on the treatment of property tax assessments made pursuant to Property Assessed Clean Energy (PACE) programs. Originally, Fannie Mae and Freddie Mac had decided to treat these assessments like any other assessment, but in May, decided to treat them as loans which may be placed in a position senior to the mortgage and thus violate the terms of the mortgage.
Yesterday, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Bank released a statement which all but puts a halt on PACE programs. In the statement, FHFA claimed that PACE programs present “significant safety and soundness concerns” and that under most of the programs, “such loans acquire a priority lien over existing mortgages.” FHFA went on to further claim that “first liens for such loans represent a key alteration of traditional mortgage lending practice [….] and present a significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities and are not essential for successful programs to spur energy conservation.”
FHFA has directed that Fannie Mae, Freddie Mac, and the Federal Home Loan Bank take certain actions. Amongst these actions, Fannie Mae and Freddie Mac will waive the prohibition against senior liens for those who have already participated in PACE programs. In addition, Fannie Mae and Freddie Mac will look to adjusting loan to value ratios to reflect the maximum PACE loan amount available to borrowers, ensure that loan covenants require approval/consent for PACE loans, and tighten borrower debt to income ratios to account for additional future obligations associated with future PACE loans.
FHFA’s statement reflects significant concern given the recent challenges faced by the real estate market. However, FHFA’s claim that PACE programs are not essential to spur energy conservation does not reflect the history and success that PACE programs have already had. These programs remove the greatest barrier to energy efficiency improvements and the addition of renewable energy, the cost.