FHFA Releases Statement Clarifying its Policy on PACE Program Loans
Earlier today, the Federal Housing Finance Agency (FHFA) released a statement clarifying that it would not allow either Fannie Mae or Freddie Mac to purchase single-family home loans that are subject to a primary lien assessed through a Property Assessment Clean Energy lending program (PACE). Consequently, borrowers with a first-lien PACE loan are not able to refinance into a mortgage guaranteed by Fannie Mae or Freddie Mac. In addition, neither firm will guarantee a loan used to purchase a home that has such a first-lien loan already placed on it.
PACE programs have been established by many state and local governments to provide homeowners with affordable loans to finance energy efficiency improvements to their homes. Sometimes these loans are structured so that borrowers repay them through their property tax assessments. Some state and local governments have argued that PACE loans that are structured this way should get priority over other loans, including the mortgage loan. This would mean that, in the event a home is foreclosed upon, the PACE loan would be paid off before the mortgage owned by Fannie Mae or Freddie Mac.
In its statement, FHFA contends that, if Fannie Mae or Freddie Mac were allowed to enter into arrangements in which their loans were not in the first-lien position, it could increase the firms’ exposure to possible risks. FHFA views such increased risk as unacceptable.
FHFA used the same justification in 2012 when it issued a proposed rule specifically prohibiting Fannie Mae and Freddie Mac for purchasing that are subject to a primary lien PACE loan and prohibiting any loans they own to be subject to such a lien. NCSHA submitted comments expressing support for the proposal, because we were concerned that, if Fannie Mae and Freddie Mac were to allow primary lien PACE loans to be placed on loans they guarantee, it could expose them to additional risk and reduce investor interest in loans to low- and moderate-income borrowers. FHFA has not yet released a final rule.
According to its statement, FHFA believes that it is important for state and local governments to understand these restrictions when considering whether they should continue to offer primary lien PACE loans. The agency pledges to aggressively enforce this policy, and to seek out other possible legal solutions for protecting Fannie Mae and Freddie Mac from losses due to PACE loans.
The statement also expresses strong concern about state laws that allow homeowner associations’ claims for unpaid dues to get first priority in foreclosure proceedings. FHFA and Fannie Mae recently filed suit in federal court and Nevada arguing that such policies are invalid to the extent that they violate Fannie Mae’s rights as first lien status holder of such loans.