Fannie Mae in Talks on Green Energy Initiative

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Fannie Mae still speaks loudly in the housing market, and a quiet letter it sent has led to intense negotiation about the future of green financing that could seriously affect your mortgage payment and your planet.

In a HousingWatch exclusive, we have learned that influential players inside and outside government are mediating between Fannie Mae and proponents of new, more-affordable financing for green homes. The new financing comes in the form of PACE bonds, which could make green retrofits more widely available to homeowners.

But they also can threaten the government-sponsored agency's first claim on mortgages.

To understand the flap, it helps to imagine Fannie and Freddie as chastened adults who have exhausted their funds and moved back in with Mom and Dad. They want desperately to show that they will no longer take on undue risk when using someone else's money.

Now imagine the PACE (property-assessed clean energy) bonds program, authorized in a handful of cities and states, as the eager younger sibling with cool friends who wants some angel capital from Mom and Dad.
PACE bonds are loans to help homeowners invest in energy performance. They are repaid through an assessment that attaches to the home's property taxes -- so the debt stays with the house, not the person, if the person sells the house. The home should, in theory, fetch a higher price because of its lower energy costs, so the debt would not impede a sale.

But the lien would get in the way of Fannie and Freddie Mac's first claim on the mortgage. And that's where negotiation has begun.

On May 5, Fannie Mae issued a terse "lender letter" with ambiguous language but an obvious point: PACE bonds, as they evolve, had better not get in Fannie's way.

"Fannie Mae supports energy-efficiency initiatives, and is willing to engage with federal and state agencies as they consider sustainable programs to facilitate lending for energy-efficiency home retrofits," said the letter, "while preserving the status of mortgage loans originated as first liens."

Translation: We got here first and we're getting out first.

So Fannie wants to protect its, um, interests while looking cooperative with the Obama Administration's goals. Why can't they negotiate a solution in meetings, rather than through menacing letters?

"This is being discussed as I speak," said someone with an inside track on Fannie's governance, who insisted on anonymity to avoid roiling the markets: "You can imagine that there might be a second lien that would be shorter than the duration of the mortgage and be paid out of the savings on energy bills."

To be fair, noted the source, the Federal Housing Administration is more nervous about losing collateral to a PACE bond because FHA loans have even less equity. Officials at Fannie and Freddie did not respond to a request for comment.

Jonathan Rose, a respected developer and green advocate, has been leading efforts to get Fannie and PACE proponents together. He told me he can sympathize with both sides.

"Fannie and Freddie are afraid," Rose said. "Say somebody buys a house, does the improvements, and sells after five years. Then the taxes are higher than the taxes on comparables. The market does not look at energy costs per home, but they do understand taxes."

Fannie would be loath to accept a mortgage for a lower amount -- or anything else that would reduce its asset recovery.

For Rose, one part of the solution entails making a home's energy use visible in its sale price. "The problem can begin to be solved if you have energy-use labeling with home sales," he said. But this is unlikely to assure Fannie that a PACE house will get a higher sales price, Rose reasoned, because the seller may have invested in efficient technologies and then used them poorly. "These things are deeply behaviorally dependent. They are not an absolute guarantee."

Insiders expect that as PACE evolves, the mortgage giants will ensure that eligible borrowers must be current on their taxes and on their mortgages.

"My sense of the solution is to start with a test, and really work out standards and underwriting criteria with one PACE program," Rose said. "But all that stuff can be figured out, and should, so we can get this thing to scale."

Meanwhile, you'll have to do your own sleuthing to figure out how a home's energy use might affect its overall value. It's worth some research, for both your pocketbook and the planet's sake.
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