FHFA Rejects Energy Retrofit Loans from PACE Program
The movement to use energy retrofit loans to install solar panels and other green climate control technology on commercial and residential properties may have suffered a serious setback following a Federal Housing Financial Authority (FHFA) announcement (pdf) last week in which they refused to accept use of the Property Assessed Clean Energy (PACE) program for energy retrofit loans. This ruling is so significant because the FHFA is in charge of regulating the Federal Home Loan Bank system, Fannie Mae and Freddie Mac, all of which are important resources for home loan funding.
The Obama Administration and the Department of Energy have plugged the PACE program as a tool for government and private property owners to finance green improvements to existing buildings. Local government bonds are used to back the energy retrofit loans, which are then repaid using a tax assessment on the home that passes on to the next homeowner.
The FHFA, while not rejecting the concept of energy retrofit loans outright, is concerned because PACE loans place the mortgage lender in second lien position to the local government entity holding the bonds. In case of foreclosure, this could leave the home lender unable to collect on the mortgage owed, since the energy retrofit loan would be legally required to be paid off first.
Without the first lien position, however, investors may shy away from the government bonds, thus placing the PACE program in jeopardy of not receiving the necessary funding, according to organizations like Renewable Funding, which arranges PACE program financing.
The FHFA also expressed concern regarding energy retrofit loans being collateral-based, with current qualifications determined by the assessed value of the property rather than on the applicant’s ability to repay the loan. It sees such PACE-like liens altering the value of the mortgage, which then extends to the value of mortgage-related securities in the investor marketplace.
Loans in place prior to May 5th, 2010, when warning letters about the program were released by Fannie Mae and Freddie Mac, will be allowed to stand as is. Future loans, however, will be restricted, leading to dismay from organizations promoting energy retrofit loans as an important tool for both the environment and green jobs creation. One of those organizations, ICLEI USA, which includes over 600 U.S. towns and cities dedicated to environmental improvement, is spearheading a campaign to save the PACE program and other energy retrofit loans from extinction.