Fannie Mae & Freddie Mac Threaten Energy Efficiency Programs

Under the Property Assessed Clean Energy (PACE) financing programs, local government borrow money through bonds or other means and then uses it to make loans to homeowners to cover the upfront costs of solar installations or other energy improvements. Each owner repays the loan over 20 years through a special property tax assessment, which stays with the home even if it is sold.

Twenty-two states have authorized PACE programs, which are intended to make it easier and cheaper for homeowners to invest in energy efficiency. So far, only a few thousand people have used them. But the Energy Department wants to promote the programs — and give an economic boost to companies that install solar panel and other energy improvement systems — through the $150 million in stimulus funds, which are intended to help communities cover setup and administrative costs.

Fannie Mae and Freddie Mac, the government entities that guarantee more than half of the residential mortgages in the United States, believe taxpayers will end up as losers if a homeowner defaults on a mortgage on a home that uses such creative financing. Typically, property taxes must be paid first from any proceeds on a foreclosed home.

In letters sent to mortgage lenders on May 5, Fannie Mae and Freddie Mac stated that energy-efficiency liens could not take priority over a mortgage. The purpose of the industry letter was to remind seller/servicers that an energy-related lien may not be senior to any mortgage delivered to Freddie Mac. However, the agencies did not offer guidance to mortgage lenders on how to handle properties that carry the energy liens. Backers of the programs fear that mortgage lenders, who depend on Fannie and Freddie to buy their home loans, will now start demanding that the entire lien be paid off before issuing a new loan. The letters have had a devastating impact on PACE programs in California, placing at risk millions of dollars of federal stimulus funding, millions of dollars of state, local and private funding, and impacting efforts to promote green jobs and greenhouse gas emissions reductions.

The mixed messages have alarmed state officials and prompted many local governments to freeze their programs, which have been hailed as an innovative way to help homeowners afford the retrofitting of a house with solar panels, which can cost $30,000 or more before incentives.

Local and state officials say that the energy liens are no different than other types of special property taxes, like those used to finance sidewalks and underground utilities. None of those have raised alarms at Fannie and Freddie. (NYT, 6/30/2010)