Green Building Law Update Service

Center for Climate Change Law

Federal PACE Program Threatened By Fannie Mae and Freddie Mac

Posted on July 6th, 2010 by J. Cullen Howe

A federal program designed to encourage residential retrofits is being potentially derailed by Fannie Mae and Freddie Mac, government entities that guarantee more than half of the residential mortgages in the U.S.

The financing technique is referred to as Property Assessed Clean Energy (PACE).  A PACE bond is a debt instrument where the proceeds are lent to property owners to financing energy efficiency retrofits.  The property owners then repay their loans over 15-20 years via an annual assessment on their property tax bill.  When the homeowner borrows the money, a lien is placed on his or her property.  These bonds can be issued by municipal financing districts or finance companies.  A PACE lien runs with the land, meaning that if the loan is not fully paid off before the property is sold, the remaining payment obligation passes to the purchaser.  The federal government has earmarked $150 million in stimulus funds to finance the program.   The program has been widely touted as an innovative way to improve energy efficiency in existing homes because it means that homeowners don’t have to front the money to do so.

First enacted by Berkeley, California in 2008 through its Berkeley FIRST program, the city provided up to $37,500 for qualifying properties to install onsite solar panels.  Many states and municipalities have followed suit, including New York State, which passed PACE legislation in 2009.

A key component of a PACE lien is that it is senior to any mortgage on the property, meaning that it must be repaid first if the property goes into default. On May 5, 2010, Fannie Mae and Freddie Mac issued letters to mortgage lenders, stating that these liens could not take priority over a mortgage financed by either entity, although they did not offer guidance on how to handle properties that currently carry such liens.

The practical result of this is that some mortgage lenders are requiring that these liens be paid off in full before approving any loans in a real estate transaction, putting the entire program at risk.  On July 2, 2010,  U.S. Representatives Henry Waxman (D-Calif.) and Barney Frank (D-Mass) wrote to Treasury Secretary Timothy Geithner, Energy Secretary Steven Chu, and Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) (the federal agency that regulates Fannie Mae and Freddie Mac), asking them to address this issue.

On July 6, 2010, FHFA issued a letter urging state and local governments “to reconsider these programs and to call for a pause in such programs so concerns can be addressed.”  The letter also stated that it was directing Fannie Mae and Freddie Mac to take the certain steps concerning these liens.

On July 14, 2010, California Attorney General Jerry Brown filed a lawsuit in federal court against Fannie Mae and Freddie Mac, accusing the entities of misrepresenting the nature of PACE programs and municipal financing in violation of California law by misrepresenting the PACE funding as loans rather than assessments.  The complaint also sought a declaration that FHFA is required to conduct an environmental assessment under NEPA before taking any action.

On July 15, House democrats introduced the PACE Assessment Protection Act, which, if enacted, would force Fannie Mae and Freddie Mac to adopt standards that support the PACE program based on Department of Energy guidelines.  The bill would ban lenders from imposing penalties or stricter criteria on municipalities that use PACE.  The bill would also prevent lenders from requiring homeowners to pay off assessments before refinancing their mortgages or selling their properties.

Add a comment

You must be logged in to post a comment.

Academic Calendar  |  Resources for Employers  |  Campus Map & Directory  |  Columbia University  |  Jobs at Columbia  |  Contact Us

© Copyright 2009, Columbia Law School. For questions or comments, please contact the webmaster.