Efficiency First

Green homeowners and the home performance industry have won a small but potentially important victory against the Federal Housing Finance Authority (FHFA).  A U.S. district court judge has ruled against the FHFA regarding the agency’s recent comments on Property Assessed Clean Energy (PACE) financing.  In July 2010, the FHFA released a statement that the PACE poses “significant safety and soundness concerns” to mortgage lenders, essentially halting additional PACE funding from lenders.  The State of California and several other entities brought a suit against the FHFA alleging that the agency violated federal and administrative laws and misled mortgage lenders.  In the August 26 ruling, Judge Claudia Wilken denied the FHFA’s request to dismiss the case and ordered the agency to hold a notice and comment period to seek public input on the matter.  Similar suits are pending in several other states, including New York and Florida.

The ruling is a welcome response to the supporters of the PACE financing, which allows homeowners to borrow money from local governments to retrofit their homes and pay back the amount owed on their property tax bills.  Launched in 2008, PACE was functional and active in 22 states and the District of Columbia, but has slowed considerably since the FHFA pronouncement.  Fannie Mae and Freddie Mac, leading mortgage lenders under the conservatorship of the FHFA, were the first to refuse to purchase mortgages with PACE financing.  Other mortgage lenders soon followed suit.  Their reasoning behind this decision was that because, in many cases, PACE liens had priority over mortgage loans, this may pose a risk to those who used mortgage loans as investment vehicles.

While the ruling has allowed the case against the FHFA to move forward, the issue is far from being resolved and does not  signal the revival of PACE lending.  The FHFA has yet to appeal the decision.  Should the agency not appeal, the case will progress to the notice and comment period.  Check back for updates as this case continues to develop.