By Carolyn Berndt
In a joint comment letter to the Federal Housing Finance Agency (FHFA), NLC, together with the U.S. Conference of Mayors and the National Association of Counties, objected to the unsupported premise of the Notice of Proposed Rulemaking concerning Enterprise Underwriting Standards for Property Assessed Clean Energy Programs (PACE) that PACE programs increase financial risks for lenders.
The comment letter, also signed by individual cities and counties, trade associations, energy companies, and nongovernmental organizations representing millions of Americans, called on FHFA to reject the proposed rule, which would block local government PACE programs, and instead adopt a modified version of FHFA's proposed "alternative 3."
In June, FHFA, in response to a court order, issued a Notice of Proposed Rulemaking on Enterprise Underwriting Standards for Property Assessed Clean Energy (PACE) programs. The proposed rule would instruct the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the Enterprises) to take any necessary actions to remove first-lien PACE obligations from their portfolio, instruct the Enterprises not to purchase any mortgage that is subject to a first-lien PACE obligation, and instruct the Enterprises not to consent to the imposition of a first-lien PACE obligation on any mortgage.
The proposed rule also outlined three alternatives that FHFA is considering, including adoption of key underwriting standards, which NLC supports.
Alternative 3, as proposed, however, does not ensure that the lender will indeed consent to a local government PACE lien even if the local government complies with the rigorous underwriting standards and program requirements set forth. Therefore, NLC supports modifying the proposed alternative 3 to ensure that the Enterprises shall not take actions to accelerate mortgages on home with PACE obligations; that the Enterprises shall be permitted to purchase mortgages on such homes, and be directed to treat PACE assessments in a similar manner as any other local government tax or assessment; and that Enterprise consent to first priority PACE liens shall be deemed to have been given.
The PACE program allows local governments to provide funds to participating homeowners 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. Twenty-eight states plus the District of Columbia have already 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 residential 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.
Local government implementation of PACE programs came to a halt when, on July 6, 2010, FHFA issued an official Statement which objected to local governments holding the first lien on PACE homes to ensure repayment of public funds if the home goes into foreclosure, calling it a significant risk to the mortgage financier.
In August 2011, the U.S. District Court for the Northern District of California found that FHFA violated the Administrative Procedure Act (APA) when it issued its July 6, 2010 statement directing Fannie Mae, Freddie Mac and the Federal Home Loan Banks to refrain from purchasing residential mortgages with PACE assessments. Specifically, the court issued a preliminary injunction and ordered FHFA "to proceed with the notice and comment process" in accordance with the APA. As such, FHFA began this proposed rulemaking.
FHFA has appealed the California District Court's order to the U.S. Court of Appeals for the Ninth Circuit (the "Ninth Circuit"). According to the court order, FHFA must issue a final rule "within a reasonable time," but the exact timeframe is currently unknown.