Transaction and Regulatory Committee Taxation and Government Finance Committee Federal Committee
This material is for discussion purposes only and has not been approved by the Taxation and Government Finance Committee, Transaction and Regulatory Committee, Federal Committee, or the Board of Directors.
Issue: Should Property Assessed Clean Energy (PACE) or PACE-like liens be senior or subordinate to a first mortgage?
Action: Required at this time if C.A.R. is to take a position on legislation introduced at the federal level or change state law to make the California PACE program subordinate and conform with the existing Federal Housing Finance Agency’s guidelines.
Options: 1. “SUPPORT” PACE or PACE-like liens being senior to a first mortgage. 2. “SUPPORT” PACE or PACE-like liens being junior to a first mortgage. 3. Other 4. Nothing
Status/Summary Under the 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; assessments have tax or “first priority” lien status in California and many other states, but not all. 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 or Freddie lien.
As a result, all local governments – with the exception of Sonoma County – have suspended their PACE programs pending a resolution of this dispute. To resolve this dispute, members of Congress have introduced H.R. 2599, the PACE Assessment Protection Act of 2011, which would require Fannie and Freddie to accept PACE liens on homes with their mortgages in either a senior or junior position.
Background: Under the 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 and 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.
On May 5, 2010, Fannie Mae and Freddie Mac issued lender letters noting that the terms of the Uniform Security Instruments for Fannie and Freddie 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 or Freddie loan 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, 2010, 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, servicers and mortgage investors.” As a result, the FHFA announced that the May 5 lender letters remain in effect which prohibit Fannie and Freddie from financing mortgages which have PACE liens senior to a Fannie Mae or Freddie Mac lien.
Outlook: This issues could be addressed at either the state or federal level. The question before the committees is whether PACE liens should be senior to a first mortgage? If these are appropriate tax liens and should be senior then this issue needs to be address at the federal level as state law already makes PACE liens senior. If PACE liens should be subordinate then the 2008 state legislation establishing the contractual assessment program needs to be amended.
There have been efforts to continue to promote the goals of the PACE program. At least one state (Maine) implemented their PACE program by making their liens subordinate to a first mortgage. Maine is offering PACE loans for 15 years at 4.99% that meet the GSE’s requirements. Maine has been able to do this because they have a $20+ million grant to fund their program over the next two years. It is unknown what the bond market will charge Maine when the grant runs out and they have to finance this program through the issuing of bonds.
Arguments: Supporters of PACE liens being senior say: • PACE liens are funded by bonds issued by local governments and putting them in a senior position allows for the best interest rates to be passed onto the homeowners. • If the borrower defaults and the property is foreclosed upon, only the missed payments of the PACE loan have seniority over the first mortgage, the balance is transferred to the new homeowner. This minimizes any risk to the first mortgage. • PACE improvements improve an entire community not just the individual property by reducing the carbon footprint.
Supporters of PACE liens being junior say: • Lenders price mortgages based on a first lien position. Allowing a new senior lien to come in after closing will force lenders to factor in this risk and increase the cost of a mortgage for all homebuyers regardless of whether or not they participate in the PACE program. • Unlike a tax lien for the benefit of an entire community, such as new pavement for a street or a new park, the improvement is only for the benefit of the individual house. Thus the PACE lien is really acting like a home equity loan used for a home improvement. • The current Sonoma County PACE loan program is a senior tax lien and is charging an interest rate of 7%. The current home equity loan has an average interest rate of 6.10%. Either the county or the bond holders are making a lot of money off of homeowners paying too high of an interest rate on a loan that has a government backed tax priority lien. • Other interest groups may see the use of a “tax assessment” as a way to promote their cause, such as earthquake retrofitting or sewer laterals. This would place the first mortgage at even greater risk of loss should the homeowner default.
C.A.R. Policy: C.A.R. has supported PACE efforts and the implementation of the program; however, C.A.R. has not taken a specific position on lien seniority.
NAR Policy: NAR, like C.A.R. also supports the PACE program but lacks policy direction on the seniority of the PACE lien.
Should Property Assessed Clean Energy (PACE) or PACE-like liens be senior or subordinate to a first mortgage?