Even After Installing Extra Insulation, the FHFA Proposed Rule on PACE Leaves Homeowners Out in the Cold
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.