U.S. regulators reject PACE financing for home efficiency, solar projects

Federal housing regulators yesterday shot down a financing program employed in California and nearly two dozen other states that lets property owners pay for solar panels and energy-efficiency projects over time through property taxes.

The Federal Housing Finance Agency, in a stern policy statement for federal mortgage holders Fannie Mae and Freddie Mac, says it could not support use of Property Assessed Clean Energy (PACE) initiatives because 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."

PACE programs may reduce risk for investors in energy retrofits, but the concept also exposes lenders because "it alters traditional lending priorities" by establishing first liens on homes that may be too risky in an already fragile housing market, the statement says.

"Underwriting for PACE programs results in collateral-based lending rather than lending based upon ability-to-pay, the absence of Truth-in-Lending Act and other consumer protections, and uncertainty as to whether the home improvements actually produce meaningful reductions in energy consumption," FHFA says.

The ruling is a blow to the Obama administration and some prominent figures in California and New York who had been trying to persuade regulators to back energy-retrofit programs as a way of instilling confidence in a shaky housing market.


California Attorney General Jerry Brown, the Democratic nominee in this year's governor's race, recently asked the regulators to send a signal in support of PACE to help local governments, homeowners and small businesses facing uncertainty about the programs, and the Energy Department has reportedly been urging FHFA officials to rule in favor of PACE (Greenwire, May 19).

But FHFA has rejected such overtures, putting $150 million in federal stimulus money for PACE in limbo, among other repercussions. The agency effectively banned PACE programs yesterday with a caveat that existing upgrades financed through PACE can be waived by lenders. Going forward, the agency said Fannie Mae and Freddie Mac "should undertake actions that protect their safe and sound operations."

These actions 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; and ensuring that mortgages on properties in a jurisdiction offering PACE-like programs satisfy all federal regulations.

Gov. Arnold Schwarzenegger's (R) office, which supports PACE programs, did not return a call seeking comment on the likely next steps in California. Federal or state legislation in response seems likely.

Sullivan reported from San Francisco.

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