September 8, 2010
Taxation and Government Finance Committee
Land Use and Environmental Committee
The following is for study only and has NOT been approved by the Taxation and Government Finance Committee, Legislative or Executive Committees or the Board of Directors.
Federal Issue:
Should C.A.R. support federal legislation requiring Fannie Mae and Freddie Mac to finance loans with Property Assessed Clean Energy (PACE) or PACE-like liens?
Action:
Optional
Federal Options:
1. Support federal legislation to require Fannie Mae and Freddie Mac to finance loans with PACE or PACE-like liens.
2. Oppose the federal legislation to require Fannie Mae and Freddie Mac to finance loans with PACE or PACE-like liens.
3. Other
4. Nothing
State Issue:
What, if anything, should the state of California do in response to the Federal Housing Finance Agency (FHFA) announcing that Fannie Mae and Freddie Mac are prohibited from financing mortgages in which a PACE or PACE-like lien would have priority superior to that of the Fannie Mae or Freddie Mac lien?
Action:
Optional
State Options:
1. Sponsor or support legislation to statutorily subordinate all PACE or PACE-like liens to any home mortgage.
2. Sponsor or support legislation to disclose the FHFA prohibition to prospective participants in a PACE or PACE-like program as well as to the potential purchasers of a home enrolled in a PACE or PACE-like program.
3. Wait until the issue is resolved at the federal level before deciding what, if anything, to do at the state level.
4. Other
5. Nothing
Status/Summary:
Under the Property Assessed Clean Energy (PACE) program, local governments make loans to homeowners to cover the upfront costs of installing energy improvements. Homeowners repay the loan through a contractual assessment collected at the same time they pay their property taxes; the assessments have tax or “first priority” lien status. The Federal Housing Finance Agency (FHFA) has announced that Fannie Mae and Freddie Mac are prohibited from financing mortgages which have PACE liens senior to a Fannie Mae or Freddie Mac lien. As a result, all local governments - with the exception of Sonoma County - have suspended their PACE programs pending a resolution of this dispute. Since it is unknown whether Congress or the courts may act, should the following state legislative alternatives be considered: (1) statutorily subordinating PACE or PACE-like liens to any home mortgage and (2) appropriately informing potential participants in a PACE or PACE-like program of the FHFA announcement and how buyers may not be able to get Fannie Mae or Freddie Mac financing.
Discussion:
Under the Property Assessed Clean Energy (PACE) program, local governments borrow money through bonds or other means and use it to make loans to homeowners to cover the upfront costs of installing solar or other energy improvements. The voluntary program has the support of REALTORS® because it avoids burdensome point-of-sale mandates requiring the installation of such improvements.
Under legislation adopted in 2008, homeowners repay the loan through a contractual assessment collected at the same time they pay their property taxes. The contractual assessment stays with the home even if it is sold since the improvements remain with the home. (Note: In 2009, the legislation was expanded to include the installation of water efficiency improvements. This year, the Legislature sent bills to the Governor to extend the program to also include the installation of sewer/septic, as well as seismic safety, improvements.)
On May 5, Fannie Mae and Freddie Mac issued lender letters noting that the terms of the Uniform Security Instruments for Fannie Mae and Freddie Mac prohibit financing mortgages in which another loan has a lien status senior to the mortgage. PACE contractual assessments were granted tax lien (or "first priority") status by the 2008 state legislation. In other words, the contractual assessments will always have a lien status superior to that of a Fannie Mae or Freddie Mac lien and, thus, run afoul of the Fannie Mae and Freddie Mac Uniform Security Instruments. In the event of a default, liens with tax priority status will be paid from the foreclosure proceedings before any of the other lien holders are paid.
On July 6, the FHFA issued a statement which noted, "First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, services and mortgage securities investors." As a result, the FHFA announced that the May 5 lender letters remain in effect which prohibit Fannie Mae and Freddie Mac from financing mortgages which have PACE liens senior to a Fannie Mae or Freddie Mac lien. However, the FHFA also announced that it was directing Fannie Mae and Freddie Mac to waive the Uniform Security Instrument prohibitions for homeowners who obtained a PACE or PACE-like loan with first lien priority before July 6.
In response to the FHFA announcement, in mid-July the Attorney General sued the FHFA to have the PACE loans declared consistent with the Fannie Mae and Freddie Mac Uniform Security Instruments. In addition, federal Representative Mike Thompson and Senator Barbara Boxer each have introduced legislation to require Fannie Mae and Freddie Mac to finance loans with PACE liens. At least 14 counties and 150 cities have suspended their PACE programs pending a resolution of this dispute.
Since it is unknown when - or how - the courts may act on the Attorney General’s suit or when Congress may adopt pertinent legislation, the question becomes whether state legislative alternatives should be considered. The alternatives at the state level of government are limited because of the federal entities involved. Only two alternatives present themselves: (1) statutorily subordinating the PACE or PACE-like liens to any home mortgage and (2) appropriately informing potential participants in a PACE or PACE-like program of the FHFA announcement.
Subordinating PACE or PACE-like liens to home mortgages would involve amending the 2008 state legislation that established the contractual assessment program to specify that the liens are subordinate to any home mortgage. That would solve the FHFA problem because, as a result of such a change, any Fannie Mae or Freddie Mac lien would be superior to the PACE or PACE-like lien. It should be noted that the amending legislation would likely be strongly opposed by local government because subordinating the PACE or PACE-like liens will discourage financiers from investing in PACE or PACE-like bonds.
The other alternative would be to require disclosure of the FHFA announcement to any potential participant in a PACE or PACE-like program or to any potential buyer of a home enrolled in a PACE or PACE-like program. The disclosure should inform the potential participants that if they elect to participate in the PACE or PACE-like program, they may have difficulty finding a buyer for their home because that buyer may not be able to secure Fannie Mae or Freddie Mac financing because of the FHFA prohibition. Similarly, prospective purchasers of a home enrolled in a PACE or PACE-like program should be warned of the same eventuality.
