Fannie Mae and Freddie Mac are villains again. Holding about half the nation’s mortgages, they were deeply involved in the country’s financial meltdown and now, with the stroke of a pen, they have brought residential solar energy retrofits to a grinding halt all over the country. Energy savings, more green jobs and improved property values are suddenly out the window.
It started with a letter Fannie and Freddie sent in early May to mortgage lenders that pointed out that a new batch of innovative solar financing programs put lenders second in line to collect if a homeowner defaulted on a loan.
The programs, called Property Assessed Clean Energy (PACE), allowed cities and counties to create assessment districts that granted loans to homeowners for energy efficiency retrofits, which could be paid back over time via an additional property tax. The balance due for the loan was transferred with the property until it was paid off. It meant homeowners could opt for energy upgrades without bearing the full up-front cost.
After the Fannie and Freddie letter, however, mortgage lenders, worried that they’d be left holding the tab, began insisting that energy retrofits be paid off in full before a house was sold or refinanced. That is making the PACE program a lot less attractive to homeowners and slowing down business for companies and employees doing the retrofits.
The hold-up is also bad news for cities that received a recent round of Department of Energy funding aimed at energy efficiency retrofits. Over 20 cities and counties, which were awarded $150 million in grants funds between them to support PACE programs, are now being sent back to the drawing board.
Yesterday morning the Federal Housing Finance Agency (FHFA) released a statement concluding that property-assessed clean energy liens present "significant safety and soundness concerns" that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
New Level of Incompetence
FHFA oversees all of them, and has instructed these lenders to "undertake actions that protect their safe and sound operations."
These include, but are not limited to: adjusting loan-to-value ratios, ensuring loan covenants require approval for any PACE loan; tightening borrower debt-to-income ratios, and ensuring that mortgages satisfy all applicable federal and state lending regulations and guidance.
“The FHFA today demonstrated a new level of incompetence," said Martin J. Chavez, Executive Director of ICLEI USA and former three-term mayor of Albuquerque, NM.
"Today’s announcement by the FHFA imposing additional layers of bureaucracy, and adjusting loan and debt-to-value ratios effectively kills all future PACE programs.”
Over the past month, mayors, activists and congressmen have been writing to the Federal Housing Finance Authority (FHFA) to save PACE programs, but to no avail.
The latest letters, sent Friday from Representatives Henry Waxman (D – California) and Barney Frank (D – New York), are addressed to Secretaries Steven Chu (DOE) and Timothy Geithner, as well as Edward DeMarco, Acting Director of the FHFA. The letters request the full support of DOE, the Treasury and FHFA in “establishing guidelines that will allow these programs [PACE] to continue, while protecting taxpayers and private lenders.”
“Well-designed PACE programs cover only cost-effective measures, which enable owners to meet this expense with the savings that accrue as a result of reduced monthly energy bills,” the letters read. “This structure also provides that the repayment obligation remains with the house, not the homeowner, when a property is sold.”
Twenty-three states have adopted legislation to permit PACE programs, and that may be one one of the reasons lenders are balking.
“What I think they [Fannie and Freddie] got their knickers twisted about is that these local programs are all different and they’d have to keep up,” Ryan Foshee, a PACE expert and regional director with ICLEI, said. “It’s impossible to scale, impossible to standardize, and I think they’re worried that the overhead is cumbersome.
“If we can get uniform PACE guidelines out there then that’s good for us and good for them.”
Many Levers
Part of the problem, according to Foshee, is that the people working on PACE initially didn’t seem to understand who they needed to get on board in order to make the programs happen.
“We had good luck with the Vice President’s office and the Department of Energy, but there are all of these levers involved that you just don’t see at first,” he said. “People want the President to go in and fix everything, but he can’t. The VP came out with a document back in January, with guidelines for PACE from his office. So he’s been on board, along with the DOE, for a long time.
"But they don’t have a direct link to FHFA, which is what governs Fannie and Freddie. FHFA reports to the House Finance Committee and the Senate Banking Committee, which are run by Barney Frank and Christopher Dodd, respectively. Those are the direct levers for Fannie and Freddie.”
Representative Frank has already spoken out in favor of PACE, but Senator Dodd has so far stayed mum, although he did pay lip service to the importance of energy retrofits, and innovative financing for such retrofits, in a recent hearing on Green Housing for the 21st Century.
PACE advocates have been pushing for FHFA to allow existing PACE programs to stand as pilots while the relevant stakeholders design uniform guidelines for PACE programs moving forward. Unfortunately, during several closed-door meetings with FHFA and representatives from Fannie Mae and Freddie Mac over the past week and weekend, PACE advocates have been unsuccessful.
In a leaked email, Cisco DeVries, the creator of PACE who first piloted the mechanism in Berkeley, Calif., wrote:
“Unfortunately, the discussions between the Obama Administration and the FHFA [Federal Housing Finance Agency] have not been successful. DOE and the White House have informed us that the senior lien — regardless of how structured, accelerated, or insured — is not acceptable to the regulators. New guidance from Fannie and Freddie to this effect is due out soon."
DOE Pulling Back
According to DeVries, DOE has begun notifying stimulus grant recipients that they probably want to start moving their grant funds away from residential PACE. Advocates are now decamping to rethink their strategy, which now relies largely on new legislation that would pave the way for PACE, this time developing guidelines before programs are rolled out.
Because the inner workings of the two-year-old FHFA and the notoriously secretive Fannie and Freddie are not well-known, legislators looking to find a place for PACE are fighting an uphill battle.
“We’re still not sure where exactly we went wrong and that’s a big problem,” Foshee said. “If we don’t know what the problem is, we don’t know how to fix it. We know they don’t like the lien priority, but that’s a matter of law and local governments have had the right for a long time to create assessment districts.
"There are plenty of other examples of them – storm water runoff districts, for example. All kinds of public improvements are made using this same mechanism, so it’s interesting that they’ve managed to boycott a legal tool of local governments.”
According to Foshee, Fannie and Freddie reps have said that PACE violates a code that the lenders operate by. “But it’s their own internal set of rules that this supposedly violates, so we’re between a rock and a hard place,” Foshee said. “On the one hand we have law on our side and on the other side they’re a giant so we’ll see how it plays out.”
This snafu is so far only affecting residential PACE programs. Similar programs exist for commercial buildings, as well, and those don’t appear to be affected yet. According to a recent report from Pike Research, a cleantech market research firm, by 2015 investment in PACE financing for commercial buildings will total $2.5 billion annually. However, in its report, Pike also noted that primary mortgage lenders, concerned that PACE liens would hold a superior position to their own loans, were a major challenge facing the financial tool.
“Even though the FHFA is a federal agency, theoretically devoted to the national good, ‘national energy independence, green jobs and greenhouse gas reduction with minimal public investment’ are not on the to-do list for Fannie Mae and Freddie Mac,” Pike researcher Levin Nock said of the recent PACE fiasco.
“Increasing property values’ should be on the list, but does not seem to carry much weight. Residential PACE would require some relatively minor changes in existing procedures at these institutions. The changes are tiny compared to the potential benefits of residential PACE programs —but apparently too large for the appropriate bureaucrats to swallow, yet.”
