The long-awaited notice of proposed rulemaking on PACE (property assessed clean energy) financing by Fannie Mae and Freddie Mac was released by the Federal Housing Finance Agency (FHFA) on June 15. The results are disappointing and consistent with FHFA’s narrow view of its responsibilities at the helm of secondary mortgage financing giants Fannie Mae and Freddie Mac.
As regulator, FHFA is charged with ensuring that Freddie and Fannie operate in a “safe and sound manner.” As conservator, the agency is charged with putting each “regulated entity into safe and solvent condition.” And FHFA and its director, Ed DeMarco, have certainly done some good. Fannie Mae’s first quarter 2012 results showed a $2.7 billion profit, its first reported net gain since it was put into conservatorship in 2008.
At the same time, FHFA is widely considered a roadblock to much-needed mortgage industry reforms that would stabilize the housing sector and bolster U.S. economic growth. The agency’s refusal to consider principal writedowns for underwater home mortgages held by Fannie and Freddie—an approach that FHFA’s own data has suggested is cost-effective -- has drawn the ire of many, including HUD Secretary Shaun Donovan, the attorney general of California, and Democratic members of Congress.
FHFA appears to be taking a similar path with respect to PACE. As I wrote last fall, PACE is a potentially valuable financing mechanism to create U.S. jobs and to advance energy efficiency in residential and commercial buildings. But FHFA’s 2010 refusal to let Fannie and Freddie participate in PACE programs shuttered most residential PACE efforts and cast a cloud over the growing PACE industry.
In PACE programs, local governments front the cost of energy efficiency improvements like solar panel installation and then levy special taxes on homeowners who choose to participate. The governments secure their investment by placing a lien against participating properties, and it's those liens the FHFA objects to. The agency says because those liens are first in line, ahead of mortgages on the property, they raise safety and soundness concerns for mortgage lenders.
Next page: FHFA supports a ban on PACE