Energy Efficiency Loans Lose the Backing of Fannie Mae and Freddie Mac

PACE loans are being opposed by Fannie Mae and Freddie MacHomeowners looking for a hand with energy efficiency just got dealt a big blow – and the fallout could affect everyone looking to take out a mortgage.

As the Wall Street Journal reports, the federal regulator that oversees Fannie Mae and Freddie Mac announced this week that it will not permit homeowners with mortgages owned by those agencies to participate in property-assessed clean energy (PACE) programs.

PACE, which has been approved by legislatures in 23 states, lets homeowners finance weatherization projects by getting loans from their local government. Those loans then get paid back over time via property tax bills, much like a sewer assessment. In order to raise money for the loans, local governments sell bonds to investors.

That's not acceptable to the feds, who object to having other creditors in front of Fannie Mae and Freddie Mac's investors, when it's time to get paid back.
In a statement issued on Tuesday, the Federal Housing Finance Agency (FHFA) declared that PACE loans "represent a significant risk to lenders," and ordered Fannie Mae and Freddie Mac to take special measures to protect themselves.

Specifically, in areas with active PACE programs, lenders who want to sell their mortgages to Fannie and Freddie must assume that all applicants will use PACE and therefore have additional debts to deal with. Borrowers are limited to smaller mortgages than they could otherwise get, compared to their income and the value of the home. Even then, Fannie and Freddie will still have to approve each PACE loan. The good news, if there is any here, is that the FHFA is now telling Fannie and Freddie that they have to accept any PACE loans that have been made so far.

The message is clear: Any city that dares to dive into PACE is going to penalize all of its borrowers and hurt its property values. San Francisco and Boulder have already suspended their existing programs, and many other cities have had to cancel plans that are now under development.U.S. Reps. Barney Frank and Henry Waxman sent a letter to the heads of the FHFA, and the departments of Energy and Treasury to demand that they find a solution.

Ironically, the Obama administration has been a big booster of PACE and has used stimulus funds to support it. What we have here, ultimately, is tragically bad timing. A gushing oil well and record-high temperatures scream that Americans need to move fast to fix up their homes for energy efficiency. But with every penny going into Fannie and Freddie under scrutiny, that's a responsibility they won't tackle -- just when the world needs them to.

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