With just two short letters—about half a page each—mortgage giants Fannie Mae and Freddie Mac began a process that would quickly undo years of work across 23 states seeking to stimulate new green jobs and energy-efficient homes.
On May 5, the mortgage lenders issued two brief statements to lenders raising concerns over the Property Assessed Clean Energy (PACE) program. Initiated as part of the federal stimulus program, PACE was intended to provide up-front money to homeowners so they could install such improvements as tankless water heaters, energy-efficient windows, and solar panels.
But the PACE financing scheme had Fannie and Freddie worried that, in the case of defaulted mortgages and foreclosures, PACE payments would take priority over the mortgage. In other words, with PACE financing in place, Fannie and Freddie feared being shortchanged in the case of a default.
“The terms of the Fannie Mae/Freddie Mac Uniform Security Instruments prohibit loans that have senior lien status to a mortgage,” Fannie said in its May 5 lender letter. In other words, they wouldn’t recognize mortgages with PACE attached.
In July, the Federal Housing Finance Agency (FHFA) kicked up Fannie's and Freddie’s complaints to federal policy.
“The [FHFA] has determined that certain energy retrofit lending programs present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks,” the agency said in a July 6 statement.
PACE is distributed in a sort of spider-web network from the feds to local governments and property owners. There are 20 such programs in California, for example. In San Luis Obispo County, funding comes from the CaliforniaFIRST program, administered by Renewable Funding.
Cliff Staton is vice president of marketing for Renewable Funding. According to him and other critics, Fannie and Freddie effectively eliminated most of the opportunities to provide PACE funding. Fannie and Freddie hold about half of the mortgages in the country. And when the FHFA stepped in, it meant no one could get PACE money.
Staton and others argue this type of financing isn’t a loan, but a tax assessment and, in fact, is a traditional financing mechanism for local governments. “That’s really the nut of the issue here: Is this a loan or a tax assessment?” Staton said.
That tiny distinction prompted three lawsuits in California. Attorney General Jerry Brown, the Sierra Club, and the City of
Sonoma have all filed separate but similar suits against Fannie, Freddie, and the FHFA.
“This is one of our frustrations,” Supervising Attorney General Janill Richards told New Times. “We reached out to the FHFA at the end of last year. We understood that they had some concerns about the program, but we believed that California was doing everything right and could satisfy any issue that they might have.”
The California Energy Commission (CEC) and the Department of Energy were preparing to begin PACE programs in 26 counties. The state spent $30 million so far, and the California Public Utilities Commission authorized $3.8 billion in stimulus funds to energy efficiency programs over the next two years, according to the CEC. But the FHFA rules “severely damaged the state’s ability to move forward,” CEC Chairman Karen Douglas said in a statement on July 16.
California’s program has been touted as extremely safe for mortgage lenders. Property owners have to hold 20 percent equity in their homes in order to qualify for funds, for example.
SLO County AICP Division Manager of Long Range Planning Chuck Stevenson said the county expected to roll the project out in October. If and when local property owners can take PACE funding, they’ll likely be eligible for anywhere from $5,000 to $15,000 chunks. Of the roughly 114,000 homes in the county, Stevenson said county officials expected PACE funding would be utilized by about 18,000.
The county was set to receive $575,000, a portion of the $16.5 million pegged to go to 14 counties and 145 cities in the CaliforniaFIRST pilot program. Stevenson said even investors who might have purchased additional county bonds for the program are skittish. “Everyone is backing away from this because of what Fannie and Freddie did.”
PACE loans are attached to property tax bills, with payments spread over about 20 years. Legally, tax assessments have priority over a home mortgage, but the payments on a PACE assessment would be insignificant compared to the mortgage as a whole if the home goes into default, proponents say.
“I think this is driven primarily by an overreaction by Fannie and Freddie to the mistakes they made,” Staton said.
The companies have collectively racked up nearly $150 billion in federal bailout funds since the national housing crisis and subsequent recession, according to Newsweek. Phone calls for comment from officials at both Fannie and Freddie were not returned before press time.
SLO County Supervisors on Aug. 3 unanimously passed a resolution supporting Congress to authorize two pieces of legislation that would effectively override the FHFA’s decision. Both the U.S. House of Representatives and Senate have crafted bills that won’t be discussed until at least Sept. 13, when Congress returns from recess.
All three lawsuits are scheduled to go to the California Northern District Court on Nov. 2. ∆
Staff Writer Colin Rigley can be reached at email@example.com.