In response to the explosion of new residential Property Assessed Clean Energy programs (PACE programs) instituted by a number of counties in California, Fannie Mae and Freddie Mac have each issued a reminder re-emphasizing the position of the Federal Housing Finance Agency (FHFA) regarding first-lien mortgage loans to be sold to Fannie Mae and Freddie Mac.
In general, PACE financing works by permitting local governments to issue bonds to fund loans to homeowners who make energy improvements to their homes. These loans are repaid by property tax assessments on the improved real properties. The concern of the FHFA, Fannie Mae, and Freddie Mac is based on the fact that the tax assessments for the repayment of PACE loans constitute first liens that have priority over consensual liens, including mortgages. Accordingly, the FHFA issued a statement in July 2010 directing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks not to purchase mortgages on properties encumbered by PACE loans without the FHFA’s approval. The FHFA’s directive was challenged and ultimately upheld in the Second Circuit, Ninth Circuit, and Eleventh Circuit.
In response to the FHFA’s concern, California created a reserve fund last year that would be used to pay off Fannie Mae or Freddie Mac for the value of any mortgage loans wiped out by a PACE loan foreclosure. California hoped that the fund would mitigate the risk of securing mortgages on properties encumbered by a first-lien PACE loan, and that, in response to this mitigated risk, Fannie Mae and Freddie Mac would change their positions with respect to residential PACE loans. With the California fund in place, many California localities have initiated residential PACE programs in the last couple of months, and more localities have indicted and interest in joining such programs.
Fannie Mae and Freddie Mac have rejected the California reserve fund as an adequate protection against the threat of first-lien PACE loans priming mortgages purchased by Fannie Mae and Freddie Mac. In two notices issued last month, Fannie Mae and Freddie Mac each issued a reminder to lenders that neither Fannie Mae nor Freddie Mac will purchase mortgage loans secured by properties with an outstanding PACE or PACE-like loan unless the terms of the PACE loan program do not provide for lien priority over first mortgage liens. Fannie Mae and Freddie Mac do make an exception for refinances with a PACE loan originated prior to July 2010, before the issuance of the FHFA directive.
Fannie Mae and Freddie Mac also require lenders to monitor municipalities that may be initiating residential PACE programs, stating that lenders “must monitor state and local law to determine which jurisdictions offer PACE loans that may provide for lien priority.” In those states that have PACE or PACE-like programs that provide for first lien priority, but require a “non-object” determination by the mortgagee, seller/servicers are required to object to the encumbrance on mortgages owned by Freddie Mac.