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Fannie Mae and Freddie Mac Gang Up on PACE


One of the major challenges for homeowners to buy and install solar panels on their homes has been trying to obtain financing. Across the nation, cities and counties are developing new finance programs that provide support to homeowners to install solar panels and green retrofits. Known as PACE (Property Assessed Clean Energy), homeowners put the cost of the solar installation on their property tax bills and pay the assessment over the long-term such as 15 years. But stop the presses--Fannie Mae and Freddie Mac have put a major impediment in the way of the PACE programs.

These promising programs are available to local governments eager to bring in new jobs, energy bill savings, and environmental benefits to their residents. But last month, Fannie Mae and Freddie Mac issued a letter, suggesting that property owners with mortgages from these lending conglomerates would be prohibited from participating in these PACE programs. Essentially, this move is a major setback for American green job growth and investment, leading government groups to try and get PACE back on track.

Similar to local governments, PACE programs have the constitutional authority to assess property taxes and use those taxes to pay for beneficial projects. PACE uses this authority to finance solar, energy efficiency, water conservation, and other green retrofits on private property. Under PACE programs, the taxes are only assessed on those properties that voluntarily participate and by allowing property owners to spread payments across this addition to their property tax bill, PACE helps Americans overcome upfront costs. Additionally, green retrofits create thousands of local jobs. Modest estimates of national PACE utilization expect the creation of at least 160,000 long-term, green jobs for the economy.

Due to remarkable propositions for jobs and the environment, PACE has noticed strong support from all levels of government. In early 2009, Congress passed legislation to ensure federal tax law doesn't stand in the way of PACE progress. The Department of Energy allocated over $100 million in Recovery Act dollars to help get PACE programs running. The PACE model was also a foundation of Vice President Joe Biden's ‘Recovery through Retrofit' policy proposal. And to this day, at least 22 states and the District of Columbia have authorized their local governments to implement PACE programs.

But all the positive impetus stopped on May 5 when Fannie Mae and Freddie Mac issued their letter, putting at risk the progress made in securing financing for homeowners wanting to go solar.  As two of the leading lending giants, the government sponsored enterprises put forth the lender guidance letters, implying PACE programs were incompatible with their mortgages. Almost instantly, fast and enraged responses came pouring in. In the Wall Street Journal, officials in Aspen, Colorado said their PACE program would be "effectively shut down" if Fannie Mae and Freddie Mac continue to oppose PACE. Boulder County Commissioner Will Toor said: "Pretty much every residential PACE financing program in the country will be on hold until the Fannie Mae issue is resolved."  

Letters of support for PACE programs were sent to the Federal Housing Finance Agency (FHFA), which oversees the two lending corporations. Several state governors, state attorney generals, mayors, and representatives across the PACE community urged FHFA to work with Fannie Mae and Freddie Mac to withdraw or modify the lender guidance letters.

The lender guidance letters expressed Fannie Mae and Freddie Mac's concerns about "new" debt negatively affecting the security of their mortgages, which according to Greentech Media, is a "misplaced" assertion, as there is no new debt created from the homeowner.

Jonathan Rose of Jonathan Rose Companies, a green real estate investment firm, stated in a Housing Watch article that he can sympathize with both PACE supporters and Fannie Mae and Freddie Mac:  "Fannie and Freddie are afraid. 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." 

Rose has been leading efforts to get the lending corporations and PACE proponents together. He suggests 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."

As PACE evolves, insiders expect that the mortgage giants will ensure that eligible borrowers must be current on their taxes and mortgages. Rose reasons:  "My sense of the solution is to start with a test, and really work out standards and underwriting criteria with one PACE program. But all that stuff can be figured out, and should, so we can get this thing to scale."

Currently, the decision is working its way through FHFA and other regulators. Senior officials at FHFA have indicated that they are engaged in a thorough review of finance standards. It's a delicate situation for Fannie and Freddie, as the companies are owned by the government, and the current administration has supported the PACE initiative. Many people are optimistic that regulators will encourage new lender policies that reflect PACE's significant returns and low risks.       

Related Articles and Blog:

PACE Coming to the Nation's Capital 

Financing, Incentives and the Future Forward for Solar