Is Fannie Mae undermining the Property Assessed Clean Energy program?
Those who entered the Property Assessed Clean Energy program (PACE) received a nice benefit -- energy-efficient improvements that could be paid for over time, ideally with the savings generated by the improvements. But Fannie Mae and Freddie Mac handed them a not-so-nice side effect -- the inability to sell their properties.
What is PACE?
PACE was created to quickly and affordably get new, sometimes expensive, energy improvements -- like solar panels and window insulation -- into millions of homes. Under the program, counties raise money through bonds and use them to pay for upgrades. The homeowners pay back these funds over time as special assessments on their property tax bills. Thus the cost of the improvements is tied to the property and doesn't follow the owners once they sell it.
What's the problem?
However, Fannie Mae and Freddie Mac, which together control about 90 percent of mortgages in the country, have chosen to classify these assessments as loans secured by the properties. Since the PACE obligations would have been incurred before any new mortgage secured by the homes, the mortgages would be in second position, behind the property assessments; Fannie and Freddie require their mortgages to be in first position.
Fannie Mae's May 5 letter to lenders characterized the PACE tax assessments as "loans" with "senior lien status to a mortgage"; Freddie Mac joined in the same day with a letter reminding mortgage lenders that an "energy-related lien may not be senior to a mortgage delivered to Freddie Mac."
Since this could make it difficult or impossible for potential buyers to get financing on the PACE homes, it makes them difficult or impossible to sell -- just what local governments and neighborhoods want to be hit with in today's difficult housing market.
California fights back
On July 14, 2010, California Attorney General Jerry Brown filed suit against the mortgage giants in federal court. The complaint reads, in part, "Because Fannie Mae and Freddie Mac control the mortgage resale market, lenders will not issue mortgages that do not meet Fannie Mae's and Freddie Mac's requirements. As a result, Fannie Mae's and Freddie Mac's determination -- which misrepresents California law -- essentially forecloses residential Property Assessed Clean Energy programs."
This could increase California's already high foreclosure rate by adding another roadblock to those who need to sell their homes to get out from under an unaffordable mortgage. It could also hurt short sales, and the banks holding the properties, because they won't be able to sell PACE homes if no one will finance them. Almost half of California's counties have developed PACE programs or plan to create one. Brown's lawsuit seeks to require the companies to recognize California law and allow the program to proceed.
Two days later, the California State Legislature placed its force behind PACE, putting forth legislation that would force the Federal Housing Finance Agency (FHFA) to participate in PACE, and dozens of its legislators contacted the White House for help.
Help from Washington?
The White House has supported PACE in the past, supplying over $150 million in stimulus funds across several states. In light of the lawsuit and the FHFA's position, however, the administration is seeking other alternatives.
"There are many other innovative financing approaches that are already being deployed to deliver significant energy savings for homeowners without exposing lenders to undue risk," stated Department of Energy spokeswoman Jen Stutsman.
Officials with the FHFA, which oversees Fannie Mae and Freddie Mac, oppose PACE because they feel that homeowners who default on their mortgage would pay back the energy lien before repaying their home loans. PACE supporters counter that the FHFA's position is irrational because, just like other property taxes, PACE loans are forwarded to and paid by new owners when the property is sold.
Local governments, in response to the difficulties presented by Fannie Mae and Freddie Mac, are exploring other ways to accomplish energy efficiency.
Should you participate in PACE?
Many PACE programs have been suspended pending the outcome of California's lawsuit and Congressional intervention. If you have access to PACE, however, should you take advantage of it? Homeowners considering energy upgrades should probably hold back for now, considering that the program could make their home unsellable.
FHA, VA provide alternatives
Those who'd like to make their homes more energy-efficient have other options. FHA makes home improvement loans and you don't need home equity to qualify. These take the form of either refinances that include extra funds to pay for qualified improvements, including energy-efficiency upgrades, and personal loans for lower amounts. Some personal loans don't even involve liens against your property. The VA will refinance your mortgage if you qualify and add up to $6,000 to your loan amount for qualified energy-related home improvements.
Improving your energy efficiency is a worthy goal and can be accomplished in several ways. Explore your mortgage alternatives and check out home equity loan rates while waiting for the government to sort out the PACE mess.
More help from HSH.com
Advantages of a FHA mortgage in 2017FHA loans have become more affordable in 2015, thanks to a drop in the annual mortgage insurance premium that the Federal Housing Administration charges.
Streamline Refinance Program to Replace HARPThe HARP refinance program for troubled or underwater homeowners will come to an end in 2017, but a new streamline refinance program will takes its place.
Flex Modification: An outline of HAMP's replacementThe Making Home Affordable Home Affordable Modification Program comes to an end on December 31, 2016, but is being replaced by a new Flex Modification program from Fannie Mae and Freddie Mac.
HSH.com’s yearly outlook: 2017 - Nine forecasts and outlooksAt the start of each year, HSH.com details the important factors we think are most likely to influence the mortgage and real estate markets in the coming year.
HSH.com on the latest move by the Federal ReserveThe Federal Reserve concluded a meeting today with no change to the federal funds rate and no changes to other monetary policy tools.