The feud between Fannie Mae, Freddie Mac, and the PACE program is heating up. I’m going to play devil’s advocate (for a moment), so let me quickly set the stage. As you will recall, Fannie Mae, Freddie Mac, and their parent entity (following the financial crisis of 2008) the Federal Housing Finance Agency (for convenience, collectively “FHFA”) single-handedly torpedoed the Property Assessed Clean Energy program (PACE), one of the best publicly and privately-funded tools for gaining energy independence. California immediately sued to stop FHFA from interfering with the programs. (United States District Court For The Northern District Of California, Case 4:10-cv-03270-CW) According to pacedata.org, five other parties have separately sued the FHFA. Just last week, the FHFA filed a motion to dismiss the California lawsuit. I am not willing to join FHFA’s motion, but I am also willing to say we can’t just scapegoat FHFA. They are just doing their job. Perhaps a compromise is in order?
For a copy of California’s lawsuit against the FHFA, click here.
For a copy of FHFA’s recently filed Motion To Dismiss, click here.
FHFA is in charge of protecting the integrity of the housing finance industry, and they have taken on PACE financing because it undermines the integrity of primary mortgages. They have a point, and they can’t just look the other way (as much as it appears they are looking straight into the pockets of big banks).
PACE debt is classified by municipalities as an assessment, and in case of non-payment the PACE debt becomes a tax lien against a home. The issue FHFA have is that in case of foreclosure, tax liens are paid first. That puts the PACE payout in front of a primary mortgage, and that undermines the integrity of the primary mortgage market. If PACE programs explode in popularity across the nation (as they were prior to the FHFA advisory letter), that’s a big problem for FHFA. The PACE debt is likely small, but if it is nationwide it is definitely an issue. If FHFA are going to be true to their mission they have to stand up to this (especially since Fannie Mae and Freddie Mac didn’t show sound judgment leading up to the mortgage-backed securities financial crisis).
The sticking point is proponents of PACE financing aren’t interested in making the PACE debt secondary to a primary mortgage. Recently, California Representative Mike Thompson (and many others) proposed a bill that’s a pretty good compromise, but still asks the FHFA to look the other way on PACE financing. The devil’s advocate is not sure this is appropriate in situations where private entities finance PACE debt.
HR 5766 requires that:
“the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation [Fannie Mae and Freddie Mac] shall adopt underwriting standards that are consistent with the Guidelines for Pilot PACE Financing Programs issued on May 7, 2010, by the Department of Energy.”
The DOE guidelines referred to in HR 5766 state:
“In states where non-acceleration of the lien is standard for other special assessments, it should also be standard for PACE assessments. After a foreclosure, the successor owners are responsible for future assessment payments. Non-acceleration is an important mortgage holder protection because liability for the assessment in foreclosure is limited to any amount in arrears at the time; the total outstanding assessed amount is not due in full.” (Full Guidelines Here)
The DOE guideline quoted above states that under a PACE program in a state where under foreclosure proceedings a primary mortgage holder can demand payment for the full amount of the debt, PACE assessments can only ask for the debt that was owed up to the time of the foreclosure. This is an important distinction. The problem is that the PACE lien still supersedes the primary mortgage to some degree.
I doubt this would be such a problem if municipalities provided all of the financing for PACE programs. Municipalities will always have the power to impose assessments. The problem is that often PACE financing is provided by private enterprise. Further, with the municipal budgets in pieces, the likelihood of private finance for PACE programs only increases. I am all for PACE programs, but allowing a private entity to supersede a primary mortgage without asking the primary lender seems a little, shall we say, inconsistent (even if the motives are pure).
For my return from the devil’s side of the argument, and some suggestions for solutions, click the “more” link here: (more…)
Steve Sacks
