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John Nephew

Maplewood City Council Policy & Politics


A Problem for PACE

Last month I referenced the energy improvements financing program that was included in legislation passed this year. Such programs are often referred to as PACE, for "Property Assessed Clean Energy."

Unfortunately, these programs have encountered a snag: The Federal Housing Finance Agency, which oversees entities such as Fannie Mae, issued a statement on July 6 about the impact of such programs on mortgage lending. The problem, in brief, is that PACE programs dictate that the loans for energy improvements become senior liens on the real estate — meaning they have a higher priority than the mortgage lender in terms of being paid in case of a foreclosure. As you may have heard, a lot of mortgage lenders have been facing some difficulties in the past few years (to put it mildly), and FHFA is concerned that PACE programs increase the risk to lenders.

The result is a set of new restrictions on the entities that FHFA regulates. As one local official from Colorado quoted in The Wall Street Journal puts it, "They're basically saying they'll redline communities that move forward with PACE financing." One of the steps being required, for example, is "Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers in PACE jurisdictions" — effectively meaning that if you buy a house in a city where PACE loans are available, you'll have to make a larger down payment to account for the possibility that you might take out such a loan.

As I understand it, Minnesota's PACE program is not yet set up. This new wrinkle may delay and alter its implementation, and may also hurt its appeal if the result is for loans not to be senior liens (which would mean more risk for the local governments implementing the program).

(h/t to City Mgr. Antonen for providing a copy of the FHFA statement and a link to the WSJ article to the City Council.)

According to an AP article this evening, the California Attorney General is suing FHFA over its decision.

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