Efficiency First

Growing national interest in Property Assessed Clean Energy (PACE) financing hit a snag a few weeks ago when the Federal Home Loan Mortgage Corporation (a.k.a. Freddie Mac) and the Federal National Mortgage Association (a.k.a. Fannie Mae) put the word out to mortgage lenders that they don’t like the idea of PACE liens taking precedence over existing mortgage debt. According to the Wall Street Journal:

In somewhat-cryptic letters that Fannie and Freddie sent to lenders earlier this month, the companies reminded banks that their agreements don’t allow them to purchase loans that have a senior lien. “An energy-related lien may not be senior to any Mortgage delivered to Freddie Mac,” the company said. Both firms said they would provide “additional guidance” if the PACE programs move beyond the “experimental stage.”

The letters suggest that Fannie and Freddie won’t allow borrowers with a PACE lien to refinance or sell their properties unless the liens are paid off. Proponents say the liens need to be senior or they won’t attract sufficient interest from bond investors. The Department of Energy, meanwhile, issued revised guidelines for municipalities that use the program.

Since then, proponents of property assessed energy improvement loans have been rallying support for PACE financing in Washington. The debate heated up this week when Cathy Zoi, the DOE’s Assistant Secretary for Energy Efficiency and Renewable Energy, wrote to Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) – which regulates Fannie Mae and Freddie Mac – to ask for clarification of the cryptic advisories sent out on May 5.

“It would be helpful if you would articulate as soon as practicable guidelines and parameters that experimental pilot PACE financing programs should follow so that their operations can proceed without encountering adverse action by the Government Sponsored Entities (GSEs) under your conservatorship,” Zoi wrote. “As you know, the Administration is committed to supporting the development of energy efficiency and renewable energy finance programs that protect homeowners and lenders while reducing energy consumption and increasing our economic competitiveness. PACE financing is one such financing mechanism among many promising options currently being piloted at the State and local level with the support of the Administration.”

Zoi’s letter reminds DeMarco in no uncertain terms that the DOE has already met with the FHFA, bank regulators and other stakeholders to “understand and incorporate lender and other perspectives on PACE programs,” and emphasizes that the “May 5, 2010, lender letters from Fannie Mae and Freddie Mac have created confusion for DOE’s grantees and stakeholders.” Zoi then requests “clarity on the specific criteria the financial regulatory community believes is necessary to enable these experimental pilot PACE financing programs to proceed. Additionally, we ask for written confirmation that property owners with existing PACE assessments will not be considered in violation of Fannie Mae and Freddie Mac Uniform Securities Instrument prohibitions against loans taking a senior position to the mortgage.”

Meanwhile, the San Francisco-based Vote Solar Initiative has commissioned a 23-page white paper detailing the legal basis for PACE financing in California. The Constitutionality of Property Assessed Clean Energy (PACE) Programs Under Federal and California Law, by Sanjay Ranchod, Jill E.C. Yung and Gordon E. Hart of the law firm Paul, Hastings, Janofsky & Walker, concludes that:

PACE programs rely on the use of a time-tested method of empowering local governments to finance improvements on private lands to achieve public purposes and to levy taxes or assessments against the benefited property. The legislative decision to give PACE taxes or assessments senior lien status is likewise supported by ample precedent addressing the constitutionality of government action that affects pre-existing private contracts.

We will continue to follow this developing story and provide status updates in future blog posts.

Read the Wall Street Journal’s coverage here:
www.blogs.wsj.com/developments/2010/05/17/fannie-freddie-freeze-out-energy-efficiency-loan-initiative

Download a PDF of the Vote Solar Initiative white paper here:
www.votesolar.org/wp-content/uploads/2010/05/PHJW-PACE-White-Paper.pdf

Learn more about PACE financing here: www.votesolar.org/explanation-of-pace