Crunch Time for PACE Financing
July 20, 2010 — Earlier this month, we reported that a popular new retrofit lending practice came under threat when Fannie Mae and Freddie Mac opposed PACE financing. In a cryptic letter issued May 5, the two mortgage brokers warned that PACE financing could interfere with mortgage repayment, a practice they reject. In June, the Federal Housing Financing Authority (FHFA) further condemned the program and laid out a course of action.
Fannie and Freddie Limit PACE
The FHFA letter said that Fannie and Freddie would take a number of actions to halt PACE financing. The plan would limit credit to all mortgage-seekers in areas where PACE financing programs exist. Fannie and Freddie would do this by adjusting lending rates in PACE jurisdictions to reflect “the maximum permissible PACE loan amount available to borrowers,” regardless of whether the borrowers intend to participate in PACE.
Those already participating in PACE programs are exempt from the new restrictions, as are PACE programs that do not place superior liens on property. However, this second type of program is uncommon because the security created by the primary lien is precisely the mechanism that has made PACE a safe and popular investment for municipalities.
PACE Advocates Fight Back
While Fannie and Freddie’s actions are putting a temporary freeze on PACE lending across the country, many states and municipalities are fighting back. On July 27, Alliance Director of Government Relations Brad Penney participated in a webinar on the PACE financing that laid out the current status and course of action for various PACE-promoting proposals:
Some PACE participants, like Sonoma County, have voted to continue their PACE program in defiance of FHFA rulings.
Boulder County, Colo., and other municipalities have argued that Fannie and Freddie's actions could set a precedent for the two entities, and mortgage lenders in general, to object to routine property assessments, endangering the 37,000 existing special assessment districts already used to finance a wide range of public works. In keeping with this stance, the Alliance and others — from environmental groups to state and federal lawmakers — publically questioned the authority of Fannie Mae and Freddie to object to PACE financing, noting that PACE functions as a normal municipal property assessment. Additionally, numerous lawsuits have been filled against FHFA on these grounds. Plaintiffs include the town of Babylon, N. Y.; Sonoma County, Calif.; and the California Attorney General.
On the legislative front, Rep. Mike Thompson (D-Calif.) introduced a bill (H.R. 5766) on July 15 that would override the objections of Fannie, Freddie and the FHFA. As of the date of posting, the bill has more than 40 cosponsors. Counterpart legislation was introduced July 22 in the Senate (S. 3642), sponsored by Sen. Barbara Boxer (D-Calif.). These bills also would prevent lending agencies from using restrictions or rate adjustments to discriminate against communities that implement PACE.
Efforts to negotiate a solution are ongoing among the three entities, the Obama administration, states and municipalities that run or hope to run PACE programs, and interested organizations.
