Villains Again? Fannie Mae and Freddie Mac Nix Innovative Home Energy Programs

Fannie Mae and Freddie Mac are villains again. Holding about half the nation’s mortgages, they were deeply involved in the country’s financial meltdown and now, with the stroke of a pen, they have brought residential solar energy retrofits to a grinding halt all over the country. Energy savings, more green jobs and improved property values are suddenly out the window.

It started with a letter Fannie and Freddie sent in early May to mortgage lenders that pointed out that a new batch of innovative solar financing programs put lenders second in line to collect if a homeowner defaulted on a loan.

The programs, called Property Assessed Clean Energy (PACE), allowed cities and counties to create assessment districts that granted loans to homeowners for energy efficiency retrofits, which could be paid back over time via an additional property tax. The balance due for the loan was transferred with the property until it was paid off. It meant homeowners could opt for energy upgrades without bearing the full up-front cost.

After the Fannie and Freddie letter, however, mortgage lenders, worried that they’d be left holding the tab, began insisting that energy retrofits be paid off in full before a house was sold or refinanced. That is making the PACE program a lot less attractive to homeowners and slowing down business for companies and employees doing the retrofits.

The hold-up is also bad news for cities that received a recent round of Department of Energy funding aimed at energy efficiency retrofits. Over 20 cities and counties, which were awarded $150 million in grants funds between them to support PACE programs, are now being sent back to the drawing board.

Yesterday morning the Federal Housing Finance Agency (FHFA) released a statement concluding that property-assessed clean energy liens present "significant safety and soundness concerns" that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

New Level of Incompetence

FHFA oversees all of them, and has instructed these lenders to "undertake actions that protect their safe and sound operations."

These include, but are not limited to: adjusting loan-to-value ratios, ensuring loan covenants require approval for any PACE loan; tightening borrower debt-to-income ratios, and ensuring that mortgages satisfy all applicable federal and state lending regulations and guidance.

“The FHFA today demonstrated a new level of incompetence," said Martin J. Chavez, Executive Director of ICLEI USA and former three-term mayor of Albuquerque, NM.

"Today’s announcement by the FHFA imposing additional layers of bureaucracy, and adjusting loan and debt-to-value ratios effectively kills all future PACE programs.”

Over the past month, mayors, activists and congressmen have been writing to the Federal Housing Finance Authority (FHFA) to save PACE programs, but to no avail.

The latest letters, sent Friday from Representatives Henry Waxman (D – California) and Barney Frank (D – New York), are addressed to Secretaries Steven Chu (DOE) and Timothy Geithner, as well as Edward DeMarco, Acting Director of the FHFA. The letters request the full support of DOE, the Treasury and FHFA in “establishing guidelines that will allow these programs [PACE] to continue, while protecting taxpayers and private lenders.”

“Well-designed PACE programs cover only cost-effective measures, which enable owners to meet this expense with the savings that accrue as a result of reduced monthly energy bills,” the letters read. “This structure also provides that the repayment obligation remains with the house, not the homeowner, when a property is sold.”

Twenty-three states have adopted legislation to permit PACE programs, and that may be one one of the reasons lenders are balking.