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The Federal Housing Finance Agency (FHFA) on July 6 effectively shut down Property Assessed Clean Energy (PACE) financing programs, which it said “present significant safety and soundness concerns,” and it directedFannie Mae, Freddie Mac and the Federal Home Loan Banks to take a number of steps to resolve problems with the first liens that are established by PACE loans.
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PACE programs have been embraced by the Obama Administration and state and local municipalities as a means to finance the upfront costs of energy-efficient retrofits for residential and commercial properties. The programs enable the costs for these upgrades to be repaid through a special assessment added to the home owner’s property tax bill. The assessment stays with the property and is transferred to subsequent owners until the retrofit costs are repaid.
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Under the programs, property owners borrow the money from their local government and repay the loans over 15 to 20 years. Funding comes from municipal PACE bonds that are sold to investors.
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PACE loans have run afoul of Fannie Mae and Freddie Mac guidelines because most establish liens that are senior to existing mortgage debt. In the case of a default, the municipality would be repaid for the PACE loan before Fannie and Freddie received any money on the mortgage.
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Some 22 states and hundreds of local governments have been developing PACE programs, with more than $100 million in federal support.
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First publicly raising concerns about the programs in a letter dated June 18, 2009, the FHFA has been working with states and localities since that time to resolve the issue through improved underwriting of the loans and most importantly to get them to accept a junior lien position, which for the most part they have been unwilling to do.
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On May 5, Fannie and Freddie issued letters to their seller/servicers cautioning them to be aware of PACE programs in their jurisdictions and reminding them that programs with liens superior to the mortgage run counter to their Uniform Security Instruments, which govern securities backed by Fannie and Freddie loan purchases.
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The letters did not provide guidance on how to handle existing PACE loans, putting a chill on existing PACE programs until further guidance was provided.
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In its July 6 statement, the FHFA said that it was directing Fannie and Freddie to waive their Uniform Security Instrument prohibitions against PACE loans with a priority first lien that were obtained by home owners before that date.
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The agency also said that Fannie and Freddie should protect their safe and sound operations by undertaking several actions to address PACE programs with first liens.
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This includes adjusting loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers. This varies by jurisdiction, but is typically 10% to 20% of the property value and can be as much as $50,000.
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Fannie and Freddie were also told to ensure that loan covenants require approval/consent for any PACE loan; to tighten borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans; and to ensure that mortgages on properties in a jurisdiction offering PACE programs satisfy all applicable federal and state lending regulations and guidance.
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It is not yet clear how Fannie and Freddie will implement this directive, but they are expected to come out with guidance for their seller/servicers. They could require that borrowers seek permission from lenders on each lien. They could also tighten lending standards for all borrowers in jurisdictions that have PACE programs.
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Significantly, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation also released statements on PACE bonds echoing the FHFA’s concerns and advising banks that invest in mortgage-backed securities with PACE liens to consider the impact of the lien on the security valuation.
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NAHB has been monitoring developments on this issue, but has formulated no policy on PACE programs. Several home builders associations have expressed interest in these programs, particularly in California and Colorado.
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For more information, e-mail Chellie Hamecs at NAHB, or call her at 800-368-5242 x8425.