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A Leg Up for PACE Programs

JUL 16, 2010 6:34pm ET
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WASHINGTON — Rep. Mike Thompson, D-Calif., and 29 other members of Congress have introduced legislation that would prevent Fannie Mae and Freddie Mac from stifling state programs that allow localities to sell bonds to finance energy-efficient ­upgrades made by ­homeowners.

The legislation follows a suit California attorney general and Democratic gubernatorial candidate Jerry Brown filed against Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency, arguing they are violating state law by blocking the programs.

The programs, dubbed property assessed clean energy, or PACE, programs, have come under fire from the mortgage titans and their regulator, the FHFA, which argue they make the underlying mortgages on participating homes too risky for the two government-sponsored enterprises.

The FHFA directed the GSEs earlier this month to tighten their underwriting standards for mortgages tied to PACE programs, warning of “significant safety and soundness concerns.” PACE programs nationwide screeched to a halt after the news, since Fannie Mae and Freddie Mac own or guarantee roughly half of the country’s single-family mortgages.

But the PACE Assessment Protection Act of 2010 would force Fannie Mae and Freddie Mac to adopt underwriting standards that would accommodate the programs, and also would prohibit them from discriminating against communities pursuing PACE programs.

In addition, the bill would prevent the GSEs from requiring homeowners to pay off money owed on PACE projects before allowing them to finance, refinance, or transfer their mortgages. The measure has been referred to the House Financial Services Committee.

“PACE programs are an important part of the push to create a green economy and reduce our reliance on foreign oil,” Thompson said in a statement. “Lending institutions should not interfere with these great green energy programs.”

The GSEs’ concern stemmed from how the programs are structured. Under a typical PACE program, a locality issues bonds to finance a number of energy-efficient upgrades or retrofits on a home, which the homeowner ultimately pays off via a special assessment on its property taxes. But that means that in cases of homeowner default, property taxes, including PACE funds, are paid off before the underlying mortgage, which the GSEs contend adds risk to their holdings.

FHFA officials also have aired concerns that the programs lack underwriting standards and do not do enough to ensure homeowners taking on the projects can actually afford to pay back the funds they received.

But proponents of PACE programs argue that municipalities regularly use these assessments to finance projects, such as sidewalk improvements and road pavings.

In his suit, Brown asked the U.S. District Court for the Northern District of California to issue an order restraining or enjoining the agencies from refusing to deal with mortgages tied to PACE projects.

“For well over 100 years, local governments in California have used their assessment powers to finance improvements that serve a public purpose … [and] it is well established that in some instances, privately owned improvements … can also serve a valid public purpose,” he said in the suit.

The FHFA defended its opposition to PACE programs last week. “Homeowners should not be placed at risk by programs that alter lien priorities and fail to operate with sound underwriting guidelines and consumer protections,” it said in a statement.

The PACE programs are slated to receive about $150 million of seed money under the American Recovery and Reinvestment Act enacted last year.

At least 21 states and the District of Columbia have given localities the ability to issue bonds to finance PACE loans, according to the database of state incentives for renewables and efficiency at North Carolina State University. Most of those programs were just getting off the ground but have been suspended or canceled due to the GSEs’ resistance.

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