“PACE” (Property Assessed Clean Energy) programs are touted as a way to fund the upfront costs of energy retrofit and onsite renewable energy projects (particularly for residential). In essence, local governments finance upfront costs, and property owners repay over time through assessments added to their property tax bills, resulting in a super priority lien to secure repayment. A key issue has been whether mortgage lenders will accept the priming PACE lien.
In May, Fannie Mae and Freddie Mac sent advice letters to their seller-servicers (at the direction of the Federal Housing Finance Agency) that PACE programs with first liens were contrary to their uniform security instruments. On July 6, 2010, FHFA issued a statement calling for a “pause” in PACE programs based on concerns about the lack of robust PACE underwriting standards and potential disruption of the traditional housing finance market. FHFA directed Fannie Mae and Freddie Mac to waive the PACE prohibitions in existing security instruments, but to take steps to protect their position for future loans, including adjusting loan-to-value ratios to reflect the maximum permissible PACE amounts, requiring approval for any PACE loans, and tightening borrower debt-to-income ratios. The Federal Home Loan Banks were also directed to review their collateral policies.
The State of California contended that the May advice letters had a devastating effect on its PACE programs and requested confirmation that they did not apply to California’s programs. In response to the July 6th FHFA statement, the State of California filed a lawsuit against FHFA, Freddie Mac and Fannie Mae seeking declaratory and equitable relief based on mischaracterization of the PACE funding as “loans” instead of “assessments,” unfair competition under state law, and violation of NEPA.
More than 20 states have already passed PACE enabling legislation, and bills are pending in a number of additional states. (See www.pacenow.org.) However, PACE funding will not be viable unless traditional mortgage lenders can be persuaded to accept the structure. The California lawsuit may provide an opportunity to accelerate a dialogue on the key issue of underwriting standards for PACE funding, which in turn may provide a foundation for acceptance by the mortgage lending industry. Until that happens, the future of PACE programs appears to be in jeopardy.
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