PACE Financing Threatened by Fannie Mae & Freddie Mac
Jul 01, 2010
by EmPower Solar
Today, the New York Times reported on a looming risk to the future of PACE financing – America’s largest mortgage guarantors, Fannie Mae and Freddie Mac. PACE, or Property Assessed Clean Energy liens, are a creative financing mechanism designed to make weatherization and renewable energy improvements affordable for more homeowners. First developed in Berkeley, California in 2008, PACE allows homeowners to pay for energy improvements through a municipal property tax lien. They are assessed a property tax increase – instead of needing to secure a bank loan – and if the property is sold, the energy lien passes on to the new owner.
Although only a small number of communities have PACE programs in place, PACE has been heralded as one of the most promising ways to encourage investment in home weatherization and solar energy systems. The process of acquiring a PACE lien is less strenuous than securing a loan AND since the benefits of the improvements are tied to the home, it makes it easier to sell the home (and the energy project) to a new owner who will continue to pay off the investment. Moreover, PACE is based on existing property lien models which use the same method to pay for things such as sidewalks, making their structure familiar to municipalities. PACE has been so well received that the Obama administration allocated $150 million to help communities establish PACE programs.
But, all of that may come to halt after Fannie Mae and Freddie Mac sent out a letter May 5 warning mortgage lenders that energy liens are “not senior to any mortgage delivered to Freddie Mac.” They claim that if a homeowner defaults on a mortgage, taxpayers will unfairly bear the burden of covering the cost of the energy lien. It is unclear why Fannie Mae and Freddie Mac are singling out PACE for this special treatment, when they accept other property liens without concern.
Already, many homeowners (most in California) have been told they will need to pay off the PACE lien in its entirety before they can acquire a new loan or refinance their mortgage. Many PACE programs have been suspended and energy projects in the pipeline have been canceled.
PACE is an excellent method of encouraging investment and deploying renewables such as solar. The Federal Housing Finance Agency should clarify its position on the issue and make it so that improving a home’s energy efficiency or installing a renewable energy system will not make it harder to secure a mortgage.