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Watt Reaffirms Ban on PACE Program Loans

Jan 27, 2015

The head of the Federal Housing Finance Agency (FHFA) has upheld his predecessor’s decision that prevented the government-sponsored enterprises (GSEs) from buying mortgages connected to the Property Assessed Clean Energy (PACE) program.

In testimony presented today before the House Financial Services Committee, FHFA Director Mel Watt made a surprising inclusion of the PACE program in his update on the agency’s goals and activities. Five years ago, Acting FHFA Director Edward DeMarco suspended the agency’s involvement in the PACE program, which used property tax assessments for financing energy-efficiency systems and solutions.

DeMarco’s move created controversy–22 states and the District of Columbia had PACE programs in place, and the Obama administration unsuccessfully attempted to change DeMarco’s mind by providing the FHFA with a two-year reserve fund to guarantee against losses created by PACE program-related losses. California Governor Jerry Brown sued the FHFA to overturn its decision, and a 2012 ruling by a U.S. district court required that the FHFA complete formal "notice-and-comment rulemaking" on the issue. But a 2013 federal appeals court upheld the FHFA’s right to prevent the GSEs from buying loans involved in this program, and the FHFA made little further mention of the subject until Watt’s new comments.

“While FHFA is not opposed to energy retrofit financing programs that allow homeowners to improve energy efficiency, these programs must be structured to ensure protection of the core financing for the home and, therefore, cannot undermine the first-lien status of Fannie Mae and Freddie Mac mortgages,” said Watt in his congressional testimony. “Concerning certain energy retrofit financing programs, such as first-lien PACE programs, FHFA has reiterated that Fannie Mae and Freddie Mac’s policies prohibit the purchase of a mortgage on property that has a first-lien PACE loan attached to it. 

“This restriction has two potential implications for borrowers,” Watt continued. “First, a homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage.  Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase.  In addition to aggressive enforcement of these existing policies, FHFA is continuing to evaluate or explore other possible remedies and legal actions to protect the Enterprises’ lien position.”

Watt added that his decision reaffirms the duties of the FHFA to “protect Fannie Mae's and Freddie Mac's rights, and [we] will aggressively do so.”

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Jan 27, 2015
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