Fannie and Freddie Drop the PACE
On May 5, 2010, Fannie Mae and Freddie Mac – two government-sponsored enterprises that operate in the secondary mortgage market – stated that they considered Property Assessed Clean Energy (PACE) financing programs to be in violation of their mortgage regulations.
Fannie and Freddie’s complaint is that PACE financing generally holds ‘senior status’ to a mortgage – that is, if the property-owner defaults, the PACE lender would be repaid before Fannie or Freddie. As such, the two organizations have indicated that they will not purchase mortgages on the secondary market from those who have PACE financing.
This position was affirmed by Fannie Mae and Freddie Mac’s regulator, the Federal Housing Finance Agency, in a statement issued July 6.
What does this mean for PACE financing?
This action would have an extremely chilling effect on PACE programs across the country. Given Fannie and Freddie’s dominance in the secondary mortgage market, mortgage lenders would not want their mortgage-holders to participate in PACE programs because it would prevent resale of those mortgages to Fannie or Freddie – or to other investors who might subsequently wish sell the mortgages on to Fannie or Freddie. This means the majority of people who hold conventional mortgages would be effectively blocked from participation in PACE programs.
Fannie and Freddie’s statement could also convince municipalities considering PACE programs to drop the idea; these municipalities are unlikely to want to operate programs for which a minority of property-holders are eligible. In addition, a number of municipalities have designated Recovery Act funding for PACE-type programs; if the issue is not resolved in the next few months, they may have to abandon such programs as this funding must be committed to projects by September.
Finding a resolution
There remains the question of whether Fannie Mae and Freddie Mac have the authority to block PACE participation. Currently, both organizations accept that property tax assessments – such as charges for sewer upgrades – are normally senior to mortgages; PACE financing is normally repaid via a property tax assessment. Yet Fannie and Freddie’s “Uniform Security Instrument” terms prohibit loans with senior lien status. Some also question whether a federal entity like the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, can effectively overrule state laws that allow PACE programs – a states’ rights issue.
The California Attorney General announced legal action on July 14, following legal action by the town of Babylon, NY the day before. Meanwhile, a number of organizations, including the Alliance, are working to find a remedy to this issue in Washington, D.C.
- Fannie Mae letter (26 kB PDF)
- Freddie Mac letter (24 kB PDF)
- Federal Housing Finance Agency statement on PACE (83 kB PDF)
