Court Deals a Blow to Residential PACE Programs

March 22, 2013

By Carolyn Berndt

Last week, the U.S. Court of Appeals for the Ninth Circuit overturned a District Court ruling and dismissed a case against the Federal Housing Finance Agency (FHFA), which was undergoing a court-ordered rulemaking procedure on Enterprise Underwriting Standards for Property Assessed Clean Energy (PACE) programs.

The appeals court held that FHFA acted within its role as "conservator" of Fannie Mae and Freddie Mac (as opposed to a role of "regulator") when it issued a decision in 2011 to cease purchasing mortgages on PACE properties. The appeals court therefore concluded that it had no jurisdiction in the matter, as the Housing and Economic Recovery Act of 2008 that created FHFA stated that any action the Agency took in its role as a "conservator" could not be challenged in court. This argument was the basis of FHFA's motion to dismiss the lawsuit, however the lower court found that FHFA acted as a "regulator" in issuing its decision and needed to undergo a rulemaking process.

An FHFA official Statement issued on July 6, 2010 and a Directive issued on Februray 28, 2011 objected to local governments holding the first lien on PACE homes to ensure repayment of public funds if the home goes into foreclosure, calling this a significant risk to the mortgage financier.

NLC continues to support local authority to implement residential PACE programs and contends that participation in the PACE program does not affect the safety and soundness of mortgages.

PACE programs allow local governments to provide funds to participating homeowners or to install energy-efficiency upgrades, which are paid back over time in the form of a special assessment. Payments are typically secured by a lien on the property that gives local governments priority of repayment if the home goes into foreclosure.

Despite an effective ban on residential PACE programs, states continue to enact laws enabling commercial PACE programs, and many communities across the country have implemented such programs.

Twenty-eight states plus the District of Columbia have passed legislation enabling cities and counties to pursue PACE programs.

When implemented in a community, the PACE program removes many of the barriers of energy efficiency and renewable energy retrofits that otherwise exist for homeowners and businesses, particularly the high upfront cost of making such an investment and the long-term ability to reap the benefits of cost savings.

The appeals court's decision came on the same day as the Institute for Market Transformation released a study  finding that default risks are on average 32 percent lower in energy efficient homes, controlling for other loan determinants. The authors conclude that lenders may want to promote underwriting flexibility for mortgages on energy efficient homes or encourage an energy audit or rating as part of the mortgage underwriting process.

Notwithstanding the court's ruling, it is possible, though unlikely, that FHFA could move forward with its rulemaking, which includes an option for developing underwriting standards. As such, NLC will continue to work with coalition partners on a legislative fix that would allow residential PACE programs to move forward, either in the form of standalone legislation or as part of a broader proposal to reform the housing finance system.