Fannie and Freddie are clueless in smacking down PACE
The Federal Housing Finance Agency (FHFA) issued guidance yesterday that drew a line in the sand against municipal energy financing, a.k.a. Property Assessed Clean Energy (PACE) programs. These innovative initiatives provide energy-efficiency retrofits for homeowners that are repaid through a property tax assessment. Since homeowners falling behind on payments must repay their PACE assessment before their mortgage, giant lenders Fannie Mae and Freddie Mac will consider participating households in default on their mortgages for receiving an energy-efficiency retrofit via PACE.
Their rationale is paper thin.
First, FHFA (and Fannie and Freddie before it) continue to erroneously call PACE financing a “loan.” PACE uses longstanding benefit assessment powers of municipal government to provide infrastructure improvements for a specific property (e.g. new sewer lines, sidewalks, or street overhauls) and to assess that property its share of the benefits. In many states, the PACE enabling legislation literally tacked energy-efficiency retrofits on to the existing assessment authority. If FHFA has a problem with PACE, they implicate the power of every city and county to invest in public goods and to assess benefitting properties for those goods.
Energy-efficiency retrofits are also public goods, in contrast to Fannie and Freddie’s claims. When a property in a city undergoes a significant energy efficiency retrofit, it reduces (indefinitely) the cost of living in that property and likely increases the property’s value. It also reduces that municipality’s dependence on imported energy sources, its emissions of harmful pollutants (like mercury) from fossil fuel power plants that supply that energy, and greenhouse gas emissions. See if a sidewalk or street (longstanding uses of assessment authority) can do that.
FHFA also falsely implies that PACE poses a significant risk to lenders. This is in stark contrast to the analysis presented in Todd Woody’s July 2 article in the New York Times — Analysis: Energy Lien Is Little Threat to Loan Giants — which suggests that the seniority of a PACE lien would, on average, put the lender behind by $75 per property. If every household in the U.S. participated in PACE and every one of those properties was backed by Fannie and Freddie, that would be a total liability of $8 billion. But if that seems like a lot, consider that Fannie and Freddie back more than $6 trillion in mortgages and that they’ve accepted $145 billion in taxpayer assistance to cover bad bets during the housing bubble.
These spurious concerns with PACE also come as a stab in the back to many PACE advocates. In guidance last fall, Fannie and Freddie suggested that they were simply looking for a framework that would minimize the risk that PACE programs posed to their lending priorities. The White House and Department of Energy issued such a framework in October 2009 and have held recipients of stimulus dollars to those limits. State enabling laws have mimicked them. PACE programs have exercised due diligence.
Despite this, the guidance letters from the lenders have not only completely undermined the program, but have even suggested that the lenders may redline any borrower in a community with a PACE program, whether or not they participate in the program, because of the perceived risks.
Some states and PACE programs are already considering legal action. Congress may take up legislation to override the giant lenders. What’s clear is that the arguments of Fannie and Freddie are paper thin and it’s time for advocates to start punching holes.