Last week, the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) and the Federal Home Loan Banks to take specified actions related to loans under Property Assessed Clean Energy (PACE) programs. PACE programs offer loans for residential and commercial property energy retrofits, to be paid back through the tax assessment system of counties and cities. FHFA raised safety and soundness concerns when PACE is structured so the loan repayments are given first lien status, like routine local tax obligations, ahead of first mortgages owned or guaranteed by the GSEs.

FHFA directed the GSEs to take several actions:
1. For any homeowner who obtained a PACE (or similar) loan with a priority first lien before July 6, 2010, the GSEs must waive existing prohibitions against such senior liens. This grandfathers current homeowners who already have PACE loans.

2. The GSEs must adopt rules to protect their safe and sound operations, including (i) lowering maximum loan-to-value ratios for loans for all borrowers in jurisdictions with a PACE program; (ii) requiring approval/consent for any PACE loan; (iii) tightening borrower debt-to-income ratios to account for potential additional GSE losses associated with possible future PACE loans; and (iv) ensuring that mortgages on properties in jurisdictions with PACE programs satisfy all applicable federal and state lending rules.

FHFA has also directed the Federal Home Loan Banks to make sure that collateral pledged by its members as security for advances is not hurt by PACE (or similar) loans that include first liens.

The new policies only apply to PACE (or similar) programs that provide for a senior lien priority for energy retrofit loans.

FHFA Statement on Certain Energy Retrofit Loan Programs