Green Building Law Blog : Green Building Lawyer & Attorney : Shari Shapiro: Calliope Communications, LLC

 Property Assessed Clean Energy (PACE) is a property assessment used to finance the upfront costs of energy efficiency upgrades.  A local government provides funding, and the assessment is paid back as a line item on a property’s tax bill.

PACE became a controversial issue in 2010, when the Federal Home Finance Authority (FHFA), the regulator of Freddie Mac and Fannie Mae, issued an order prohibiting Freddie Mac and Fannie Mae from purchasing mortgages with PACE assessments on them. The concern was that, as property tax assessments, the PACE loans would have priority over the Freddie Mac and Fannie Mae-backed mortgages, so the PACE loans would get repaid first out of any foreclosure sale proceeds.

FHFA proposed a rule on PACE financing on June 15, and is available for download here. The FHFA has not changed its position, and the proposed rule is a blanket prohibition on purchasing mortgages on PACE encumbered properties, and from consenting to PACE liens on properties with existing Fannie Mae and Freddie Mac backed mortgages. The argument is that the threat of default is immeasurable, and the environmental benefits difficult to calculate, so it is not worth the risk.  If the FHFA rule becomes final, PACE is dead. Comments on the rule are open until the end of July. 

If the FHFA rule goes into effect, what happens to the homeowners who already took PACE loans?  Many communities have had PACE programs in place for some time.  The FHFA rule will certainly prevent Fannie Mae and Freddie Mac from backing loans when those homes are sold unless the PACE loan is paid off.  Likewise, the PACE loan will have to be paid off if the home is refinanced. This will be an ugly surprise for those homeowners that took a PACE loan specifically because it was transferable with the property. 

More concerning is whether the FHFA rule could be read to require Fannie Mae and Freddie Mac to call the mortgages on properties with a PACE assessment.  The proposed rule states that Freddie Mac and Fannie Mae are required to:

immediately  take such actions as are necessary to secure and/or preserve their right to make immediately due the full amount of any obligation secured by a mortgage that becomes, without the consent of the mortgage holder, subject to a first lien PACE obligation.

In other words, if you take on a PACE loan, you have to pay off your mortgage. 

The rule doesn't specifically address retroactive application of the rule, but the phrase "becomes...subject to a...PACE obligation" seems to be proactive, as opposed to retroactive. With a hammer as big as calling a mortgage, however,  the final FHFA should specifically state that it does not apply to existing PACE loans. 

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Property Assessed Clean Energy (PACE) programs allow local governments to loan money to homeowners to do energy efficiency projects.  The PACE loans are generally repaid as a property tax line item.  PACE programs were initially very popular, and more than 25 states passed PACE-enabling legislation.

As discussed in earlier posts, in the summer of 2010 the Federal Housing Finance Agency put the brakes on PACE programs.  The FHFA issued an advisory that Fannie Mae and Freddie Mac should put more stringent evaluation standards in place for mortgages on properties with PACE assessments.  On February 28, 2011, FHFA issued a directive stating that Fannie Mae and Freddie Mac should continue to refuse to purchase mortgages on properties with PACE loans.

In the wake of the FHFA actions, several law suits were filed, including one in the Northern District of California.  The plaintiffs in the California PACE case alleged that the FHFA acted without following the appropriate administrative procedures, and without doing and Environmental Impact Assessment. 

The District Court issued a preliminary injunction requiring FHFA to proceed with the the necessary administrative steps that FHFA had failed to do prior to issuing its greenlining mandates.  

On January 26, 2012, the FHFA began the  "notice and comment" period for advanced notice of proposed rulemaking on PACE.  Specifically, the FHFA's proposed action is to prevent Fannie Mae and Freddie Mac from buying certain mortgages whether or not the particular mortgage has a PACE assessment associated with it:

FHFA's Proposed Action would direct [Fannie Mae and Freddie Mac] not to purchase any mortgage that is subject to a first-lien PACE obligation or that could become subject to first-lien PACE obligations without the consent of the mortgage holder.

The wording of the proposed rule is interesting.  Not only would it prevent Fannie and Freddie from buying mortgages on properties with PACE loans, but also potentially from buying any mortgages in a community that has a PACE program, whether or not the particular mortgage has a PACE loan associated with it. 

The Advanced Notice of Proposed Rulemaking triggers a 60-day comment period, which opened January 26 and closes March 26.  The ANPR seeks comments about both the environmental and fiscal aspects of PACE.  The ANPR is here.

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The Natural Resources Defense Council (NRDC) sued the Feds today to reinstate the PACE program.  The PACE program was a component of ARRA (the Stimulus Bill for those of you non-lawyer geeky types who still choose to read my blog) which allowed the upfront costs of property owners’ clean energy and energy efficiency projects to be financed by local governments, and paid back by homeowners as an increase in  their property taxes. 

The concept behind the PACE program is that the energy savings from energy efficiency and clean energy projects would outstrip the costs over time, but that the upfront costs were a barrier to many people in implementing the badly needed changes. 

Several municipalities and states had implemented these programs, and it sounded like such a good idea that $150 million in the ARRA was dedicated to support them.

Homeowners are able to do the energy upgrades, local governments can take action to ameliorate climate change and the Federal government will help with the financing.  Everybody's happy, right?

Not so fast. The Federal Housing Finance Agency, which regulates government sponsored mortgage buyers Fannie Mae and Freddie Mac, and the Office of the Comptroller of the Currency, which regulates national banks stopped the PACE programs in their tracks.  According to the NRDC's complaint, available here, the Defendants refused to issue mortgages that had a PACE loan in first priority. 

According to the NRDC press release summary of the claims:

NRDC is suing the agencies for halting the programs without justification, and for doing so without following the proper protocol as required by law. This includes failing to conduct a review of the environmental impacts and to provide the public an opportunity to comment before taking this action.

The objections to the actions on PACE have mainly to do with statutory procedural requirements for administrative agency action, the suit serves to shed a light on what is essentially "greenlining"--a modern day equivalent of "redlining."    

 In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners' Loan Corporation (HOLC) to look at 239 cities and create "residential security maps" to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual's or household's ability to satisfy standard lending criteria. Since African-Americans were unwelcome in white neighborhoods, which frequently instituted racial restrictive covenants to keep them out, the policy effectively meant that blacks could not secure mortgage loans at all.

The foreclosure crisis that stemmed from complicated financial instruments legitimately scared the wits out of the Federally backed mortgage entities.  But now they are too scared to even do the right thing and support a new financial model that has the possibility of allowing millons of homeowners to make their homes more energy efficient--which will, in turn, create demand for green products and people to manufacture them and install them, which will enable those people to...pay their mortgages.

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