Fannie, Freddie Freeze Out Energy-Efficiency Loan Initiative
The Wall Street Jouranl
By Nick Timiraos
May 17, 2010
Fannie Mae and Freddie Mac are giving the cold shoulder to a White House-backed effort to encourage Americans to make their homes more energy efficient.
The initiative, called Property Assessed Clean Energy, or PACE, aims to eliminate the high upfront costs that have kept homeowners from making cost-saving energy retrofits on their homes. Under the program, property owners borrow money from their local government to pay for the retrofits, repaying cities over 15 to 20 years through a special assessment that is added to their property-tax bills. Local governments fund the programs by selling municipal bonds to investors.
But the programs are raising the blood pressure of mortgage investors, including Fannie Mae, Freddie Mac, and their regulator, because PACE liens become senior to existing mortgage debt. That allows PACE lenders to be paid before mortgage lenders if the homeowner defaults and goes into foreclosure.
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.
Fannie and Freddie control around two-thirds of all mortgage lending in the country right now, with the remainder largely shouldered by government agencies such as the Federal Housing Administration. That means that their rules have a particularly wide reach.
Officials in Aspen, Colo., told the Aspen Times that their PACE program would be “effectively shut down” if Fannie and Freddie continue to take such a view.
Colorado’s Boulder County has suspended its energy-loan program in order to insure compliance with the new Energy Department guidelines and to clarify what Fannie and Freddie’s guidance means for their programs. In an email, Boulder County Commissioner Will Toor said that his discussions with other local governments indicate that “pretty much every residential PACE financing program in the country will be on hold until the Fannie Mae issue is resolved,” said Mr. Toor in an email.
A spokeswoman for Sonoma County, which has one of the country’s largest programs, says that they haven’t had to suspend their programs for now because they fund their own loans through the county before selling them to bond investors. They also don’t use federal stimulus funds, which means they won’t have to follow federal guidelines.
“There are a heck of a lot of people who really need that new furnace but have no equity. Thank God we have a program like this,” said Amy Bolten, the county spokeswoman.
It’s a delicate dance for Fannie and Freddie because the companies are owned by the government, and the current administration has supported the fledgling PACE lien initiative. Fannie and Freddie aren’t allowed to lobby or take positions on public policy matters, but have raised concerns with other government agencies and with their regulator, the Federal Housing Finance Agency, which also opposes the senior-lien structure of PACE programs.
Proponents have hailed the programs as novel ways to bring market mechanisms to bear on energy retrofitting. But critics say that the programs don’t do enough to ensure that borrowers can repay their loans because municipalities don’t do any underwriting. They also worry that homeowners with little or no equity could ply more debt to their properties.
Energy Department rules released last week urged municipalities to conduct energy audits to ensure that homeowners will see reduced costs as a result of upgrades and said that assessments should be limited to 10% of the property value.
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