FHFA issues caution against PACE energy loans
The Federal Housing Finance Agency (FHFA) has issued a statement saying Property Assessed Clean Energy (PACE) loans present “significant safety and soundness concerns” and has set new rules for federal mortgage lending giants Fannie Mae and Freddie Mac to address issues with the PACE program. In response, officials with Boston-based ICLEI-Local Governments for Sustainability (ICLEI) say FHFA has “demonstrated a new level of incompetence” with the statement.
PACE loans allow cities and counties to finance residents’ energy efficiency retrofits and on-site renewable energy generation installations through loans that are repaid with a property tax assessment. FHFA’s concerns about the program focus on the fact that many PACE loans establish a priority lien over existing mortgages. “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,” FHFA says in its July 6 statement. “The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives.”
The statement goes on to direct Fannie Mae, Freddie Mac and the Federal Home Loan Banks to undertake the following actions:
1. For any homeowner who has already obtained a PACE or PACE-like loan with a priority first lien, Fannie Mae and Freddie Mac should waive their Uniform Security Instrument prohibitions against such senior liens.
2. In addressing PACE programs with first liens, Fannie Mae and Freddie Mac should undertake actions that protect their safe and sound operations, including, but not limited to:
– Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers in PACE jurisdictions;
– Ensuring that loan covenants require approval/consent for any PACE loan;
– Tightening borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans;
– Ensuring that mortgages on properties in a jurisdiction offering PACE-like programs satisfy all applicable federal and state lending regulations and guidance.
3. The Federal Home Loan Banks are directed to review their collateral policies to assure that pledged collateral is not adversely affected by energy retrofit programs that include first liens.
ICLEI Executive Director Martin Chavez responded harshly to the FHFA statement. “The FHFA today demonstrated a new level of incompetence in recognizing and fueling innovation, energy efficiency and job creation,” Chavez, a former three-term mayor of Albuquerque, N.M., said in a statement. “Today’s announcement by the FHFA imposing additional layers of bureaucracy, and adjusting loan and debt-to-value ratios effectively kills all future PACE programs.”
Twenty-three states have enacted PACE-enabling legislation. Costs on the loans are paid in annual increments through a homeowner’s annual property tax bills over 15 to 20 years with benefits gained through energy savings.