As if weak home prices and sluggish sales weren’t enough bad news for the U.S. housing sector. Now, it seems, fresh uncertainty has splashed cold water on an innovative approach to financing energy-related home improvements.
At issue? Fannie Mae and Freddie Mac want to be paid first.
According to the New York Times, the government-chartered enterprises have recently indicated they might not accept loans for homeowners who participate in Property Assessed Clean Energy (PACE) financing programs.
Under a PACE approach, a local or state government raises funds, typically via bonds, and then lends the cash to property owners so they can cover the upfront costs associated with installing solar panels or other energy- and water-efficiency related technologies. The owner, in turn, repays the loan through a special property tax assessment. Unlike a conventional loan, where the debt obligation stays with the individual, under a PACE approach the obligation stays with the property, even in the event of a sale.
For their part, Fannie and Freddie don’t want local PACE-related payments to supersede mortgage payments. The New York Times article explains further:
They are worried that taxpayers will end up as losers if a homeowner defaults on a mortgage on a home that uses such creative financing. Typically, property taxes must be paid first from any proceeds on a foreclosed home.
In letters sent to mortgage lenders on May 5, Fannie Mae and Freddie Mac stated that energy-efficiency liens could not take priority over a mortgage. “The purpose of this industry letter is to remind seller/servicers that an energy-related lien may not be senior to any mortgage delivered to Freddie Mac,” wrote Patricia J. McClung, a Freddie Mac executive.
However, the agencies did not offer guidance to mortgage lenders on how to handle properties that carry the energy liens. Backers of the programs fear that mortgage lenders, who depend on Fannie and Freddie to buy their home loans, will now start demanding that the entire lien be paid off before issuing a new loan.
The letters have not gone unnoticed. Those who have already taken advantage of PACE funds are of course concerned by the development. California Governor Arnold Schwarzenegger and New York Mayor Michael Bloomberg have taken note, too, as have officials at the federal level. The U.S. Department of Energy has made available $150 million in stimulus funds to help local governments get PACE programs off the ground. So far, 22 states have OK’d such programs.
What does all this mean? Stay tuned. Fannie Mae and Freddie Mac guarantee more than half of all U.S. residential mortgages. As a result, their policies and opinions have a material impact on the U.S. housing market. Like most policy discrepancies, this one will likely be worked out over time. Let’s just hope the consensus tilts in favor of supporting PACE financing rather than weakening it.
The reality is that PACE will not materially affect the cost of mortgages from Fannie Mae and Freddie Mac.
If homeowners default on their mortgages, then they ARE liable to pay their tax assessment before they pay off their mortgage. However, the cost of a solar electric or geothermal system is financed through PACE over 15 or 20 years. The truth is probably one or two tax assessment would come before this Fannie Mae and Freddie Mac mortgage. The home may eventually foreclose and be sold to the next person who would assume the assessment.