Are Housing Regulators Quietly Dropping Their Opposition to PACE?

The Federal Housing Finance Agency, the government entity responsible for regulating America's multi-trillion-dollar secondary mortgage market, is reportedly easing its opposition to local programs that allow homeowners to pay for renewable energy and efficiency retrofits through their property taxes.

That's according to a report from Asset-Backed Alert, an industry publication that covers securities markets. The publication reports that the Federal Housing Finance Agency (FHFA) has reached deals with lenders that will permit Fannie Mae and Freddie Mac, the nation's two biggest housing underwriters, to purchase mortgages for homes participating in property-assessed clean energy (PACE) programs. 

For the past four years, FHFA has been publicly opposed to underwriting mortgages for homeowners that have received PACE loans. The agency says municipal PACE loans are too risky for Fannie and Freddie because they must be paid back first if a homeowner defaults. 

However, after five years of experience, there is no evidence that PACE has increased the risk of default. 

Matt Birkbeck, a reporter with Asset-Backed Alert, described the agency's softening stance:

The Federal Housing Finance Agency has reached an agreement with several mid-size lenders that will allow Fannie and Freddie to buy mortgages on homes encumbered by liens booked under the property-assessed clean energy (PACE) program, so long as the mortgage lenders agree to repurchase any of the home loans that default. The FHFA, which declined to comment, has yet to officially adopt the policy.

PACE obligations enjoy first-lien status in most states, rendering municipalities first in line to be repaid -- ahead of the mortgage agencies -- in the event of mortgage default. Specifically, Fannie and Freddie have been refusing to buy mortgages that refinance homes with PACE liens or mortgages financing the purchase of homes with PACE loans taken out by previous homeowners.

One industry source said the FHFA “surprised a lot of people” by agreeing to allow purchases of mortgages on homes with PACE liens.

So far, 31 states have passed legislation enabling PACE financing, despite the fact that FHFA’s longstanding position curtailed the development of the program.

When asked by Greentech Media if FHFA has changed its position, a spokesperson for the agency was blunt: "We have not changed our policy at all."

The Asset-Backed Alert story does not conclude that regulators have officially changed their policy. Rather, it seems the agency is moderating its position behind the scenes -- as long as other lenders are willing to bear the risk of taking on mortgages that are part of PACE programs.

Birkbeck reaffirmed his reporting: "They do have agreements with several lenders. We are confident in our sources."

FHFA's public opposition to PACE initially slowed growth of these programs, which allow homeowners to finance an energy efficiency retrofit or renewable energy installation over twenty years through their property taxes. Many communities worried that FHFA would redline them if they expanded PACE offerings.

But in the last year, communities throughout California, Connecticut, Florida and New York have started offering PACE loans in record numbers. The wave of defaults feared by FHFA has not hit Fannie and Freddie, and the agency has not penalized communities for creating PACE programs.

"There have been many thousands of projects completed since 2008. There's no evidence that PACE has caused defaults," said Cisco DeVries, CEO of Renewable Funding, a PACE administrator based in California.

In California, where residential PACE has expanded fastest, the government created a $10 million loan-loss reserve in order to back any defaults that might threaten mortgage lenders. Although the fund did not fully alleviate FHFA's concerns, it was part of an ongoing effort to lower any risks from PACE faced by Fannie and Freddie. 

Now, according to Birkbeck, some mid-sized lenders appear willing to take that risk on themselves by agreeing to repurchase mortgages that go into default. 

J.P. McNeill, the CEO of Renovate America, California's largest PACE administrator, said that he "could neither confirm or deny" whether FHFA had changed its relationships with lenders supporting PACE-tied mortgages. But he did say that such a shift would make sense, given the spread of PACE programs across the country. 

"It's not necessarily a change in policy. I view it as FHFA evaluating another alternative in which risk is absorbed by some other entity," said McNeill. "If the risk can be borne by the lender, then Fannie and Freddie can avoid it."