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Freddie, Fannie reject energy retrofit loans

Federal Housing Finance Agency, which regulates the U.S. mortgage giants, opposes White House-backed PACE loans for green retrofits, threatening the program.

The Federal Housing Finance Agency announced Tuesday that the Property Assessed Clean Energy, or PACE program, backed by the Department of Energy and the Obama administration, is unacceptable for mortgage lenders to allow in its current form.

It's a move that will affect the program and those like them significantly as the Federal Housing Finance Agency (FHFA) regulates Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks.

The PACE program offers loans to owners of residential or commercial properties for the purpose of retrofitting their properties with green tech options like solar panels. The loan, which is backed by local government bonds, is often structured as a low-interest loan that is paid back to the government through a tax assessment on the home that remains in place even if the house is sold.

The FHFA said it does not object to all energy retrofit loans, but specifically to those PACE or PACE-like energy loans that are essentially structured as property taxes and, therefore, have first lien. In the event of a foreclosure on the property, those loans are legally required to be paid off first before any money goes to the mortgage lender.

It's that first lien that makes the local government bonds, which are being used to fund the programs, attractive to investors. Without first lien, it's believed PACE programs may not get the bond funding necessary to proceed, as was told to Dow Jones news service by Francisco DeVries, whose company Renewable Funding helps arrange financing for PACE programs.

The FHFA said in its statement (PDF) that it also objects to the loans being collateral-based (qualification based on the property's tax assessed value) rather than on an individual's ability to pay. It further said that allowing such liens changes a mortgage's essential value, and, therefore, the value of mortgage-backed securities in the larger market.

"They present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities, and are not essential for successful programs to spur energy conservation," the FHFA said in its statement.

The FHFA said any energy retrofit loans already in place prior to May 5, when Fannie Mae and Freddie Mac issued letters to its seller-services warning that the program was in violation of mortgage lending rules, may stand as is. But all other FHFA-regulated mortgages in areas of the country offering "PACE or PACE-like programs" are subject to restrictions.

The restrictions will include: "Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers in PACE jurisdictions; Ensuring that loan covenants require approval/consent for any PACE loan; Tightening borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans..."

In other words, owners with an FHFA-regulated mortgage are required to get permission from their lender before a PACE-like loan may be granted. The mortgage lender will have final say as to whether the loan is approved and the size of the loan that can be granted to the owner by the local government program.

It's a blow to the Department of Energy, which backed the program, and to the communities that participated and saw it as a way to stimulate green tech jobs in their community.

San Francisco, in particular, may be affected greatly by the PACE changes: the city launched an ambitious program of $150 million in available financing for energy loans in April after Gov. Arnold Schwarzenegger signed a California law backing PACE programs in his state. San Francisco received more than $2 million in federal stimulus funds to go toward its PACE program.

ICLEI USA, the sustainable-government organization affiliated with more than 600 U.S. towns and cities whose members include Atlanta, Boston, Chicago, Denver, Houston, and New York, expressed outrage at the FHFA announcement. More than 25 U.S. states participating in PACE programs could be affected by the FHFA announcement, according to ICLEI USA, including: Arizona, Maryland, Oregon, Nevada, Texas, Colorado, Florida, Virginia, North Carolina, Louisiana, and Oklahoma.

"The FHFA today demonstrated a new level of incompetence in recognizing and fueling innovation, energy efficiency, and job creation. The latest announcement by the FHFA, imposing additional layers of bureaucracy, and adjusting loan and debt-to-value ratios, effectively kills all future PACE programs," Martin J. Chavez, executive director of ICLEI USA and former three-term mayor of Albuquerque, N.M., said in a statement.

"Before this latest FHFA action, PACE was poised to weatherize millions of homes and place solar panels on residences across the nation. Thousands of nonexportable jobs in the crucial residential-construction industry have been jeopardized," Patrick Hays, mayor of North Little Rock, Ark., and chairman of ICLEI USA, said in a statement.

Updated at 10:30 a.m. PST to include a response from ICLEI USA.