Discouraging news on the status of PACE financing began to leak out of Washington this holiday weekend with reports that the Obama administration has failed to persuade the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to accept mortgages on properties with PACE liens attached. Late Friday, PACE financing pioneer Cisco DeVries of California-based Renewable Funding circulated an e-mail message to PACE advocates stating that:
Unfortunately, the discussions between the Obama Administration and the FHFA have not been successful. DOE and the White House have informed us that the senior lien — regardless of how structured, accelerated, or insured — is not acceptable to the regulators. New guidance from Fannie and Freddie to this effect is due out soon. DOE has begun notifying ARRA grant recipients that they probably want to start moving their grant funds away from residential PACE.
A subsequent report in the New York Times confirmed that Cathy Zoi, the DOE’s Assistant Secretary for Energy Efficiency and Renewable Energy, had contacted DeVries to say that “the administration needed to begin contingency planning on what to do with stimulus funding for PACE.” The Times also quoted Ben Pearlman, a county commissioner in Boulder, Colorado, who received a similar call from Secretary Zoi saying that “in light of the circumstances we should look at other ways of financing energy efficiency with the stimulus money.”
Although Fannie, Freddie and the FHFA have yet to issue formal guidelines regarding PACE liens, local governments across the country are freezing their property-assessed lending programs pending government action that would clear the way for PACE lending to resume.
Meanwhile, Rep. Barney Frank, chairman of the House Financial Services Committee, and Rep. Henry Waxman, head of the House Energy and Commerce Committee, have sent a letter urging administration officials to “quickly identify, agree on and publish guidelines that would allow PACE financing programs to continue while ensuring that both taxpayer and private mortgage investments are protected.” And the Washington Post has cited an anonymous source within the Department of Energy saying that the DOE is “seeking protection for homeowners who have already taken on PACE financing.”
Minimal financial impact: Earlier on Friday, before these latest reports began to surface, the Times‘ Todd Woody posted a thought-provoking analysis suggesting that the potential liability related to PACE liens would be tiny:
Putting aside whether such liens are any different from the property tax assessments commonly used to finance municipal improvements, how big a potential liability would Fannie and Freddie face?
Not very big, according to an analysis by the California attorney general’s office.
In a June 22 letter to the Federal Housing Finance Agency, which oversees Fannie and Freddie, Ken Alex, a senior assistant attorney general, cited the example of a homeowner who obtains $15,000 in financing from a PACE program to pay for a solar array and energy efficiency upgrades.
With a 7 percent interest rate and a 20-year payback term, the annual assessment on the homeowner’s property tax bill would be about $1,500.
“At the time of foreclosure for failing to pay the mortgage, it is likely that at most, one PACE assessment of $1,500 would have achieved priority lien status,” Mr. Alex wrote.
“This exercise suggests that with a portfolio of Fannie/Freddie mortgages that have PACE liens, assuming a high foreclosure rate of 10 percent, PACE seniority would average $150 per home,” he added. “Using a more reasonable foreclosure rate of 5 percent, average PACE seniority per home would be a mere $75.”
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