The local California programs that allow homeowners to pay for green renovations through an added assessment on their property taxes is in jeopardy. The BerkeleyFirst program – the first Property Assessed Clean Energy (PACE) program in the nation, is still up and running, but San Francisco suspended the GreenFinanceSF program, and Sonoma County now sends warning letters out with every application. Mind you, 22 states now have PACE programs (enabled in California by AB 811), and President Obama wants to allocate $150 million in federal funds for these programs. Someone in his office better call the Federal Housing Finance Agency (FHFA), because they don’t like the programs one bit.
The issues started when Fannie Mae and Freddie Mac sent out a letter in the beginning of May that scared some investors and homeowners because it stated, “an energy-related lien [i.e. PACE loan] may not be senior to any mortgage delivered to Freddie Mac.” Then, at the beginning of this month, the FHFA (who oversee Fannie and Freddy) stated that the PACE loans pose a risk to lenders, and called for the programs to be stopped. Last week, California shot back and sued the Federal Government to have the FHFA back PACE programs.
FHFA’s concern is that if a property goes into foreclosure, property taxes are the first debts paid off. Since the PACE loans are an assessment included in property taxes, the PACE loans would be paid off first in a foreclosure. Almost universally, a primary mortgage is paid off before any subsequent loans taken on a property. The PACE loans throw that fundamental rule out the window. This allegedly adds risk to the primary mortgage, and since Fannie and Freddie are the largest purchasers of mortgages in the nation, they object.
To make matters worse, a New York Times article reports that Fannie and Freddy might not accept mortgages with PACE loans. Fannie and Freddy turning down mortgages is huge. The two entities own nearly 50% of the mortgages in the nation, and banks rely on the ability to sell mortgages in bulk to Fannie and Freddie. If PACE loans make mortgages less valuable in the mortgage market (the banking market that bundles groups of mortgages and sells them wholesale between banks and investors . . .e.g. “mortgage-backed securities”), that will essentially end the programs.
I understand the FHFA point of view, but I think their concerns are overblown. The improvements to the property add value, and the PACE payments are generally very small. A $25,000 loan at 6.5% over 20 years comes to about $185 / month. If you consider the savings to the owner’s energy bill, are we really talking about a debt obligation that will jeopardize someone’s mortgage payment? Indeed, what if the local government just increased taxes outright?
The PACE programs are gaining tremendous momentum, creating jobs, and leading us toward energy independence. Throwing a wrench in the system over something quite small is not only counter-productive, its subversion. We’ll track this issue closely, and let you know of further developments.
More on the lawsuit from Sustainable Business here
More on the lawsuit from the San Francisco Chronicle here
The CGBB first post on BerkeleyFirst is here
Steve Sacks
