“A White House-backed effort to encourage home-energy improvements was dealt a blow Tuesday after a federal regulator said the program posed significant risks to mortgage lenders and investors.

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, suggested the mortgage finance titans should avoid participating in the program or should tighten their lending standards where the initiative moves forward.

The move could effectively torpedo the fledgling program that lets homeowners borrow money from their local governments to finance the high upfront costs of energy-efficient upgrades, like solar panels or efficient furnaces.

City and state leaders say the decision could put at risk a program they had hoped would boost jobs and conservation efforts.

The development is a setback to the Department of Energy, which had championed the program, called Property Assessed Clean Energy, or PACE.

It also marks a rare instance in which Fannie and Freddie, through their regulator, have refused to adopt a policy directive from the Obama administration.

PACE lets homeowners use special property-tax assessments to pay off, over 15 to 20 years, the cost of new improvements. Local governments sell municipal bonds to fund it.

While PACE enjoyed White House support, it raised concerns of Fannie and Freddie and their regulator because PACE liens are senior to existing mortgage debt. That helps cities sell bonds more easily, but it means that in the event of a foreclosure, PACE liens are paid off before the mortgage lender gets any money.

In May, Fannie and Freddie said the liens violated the terms of their contracts to purchase loans from lenders and said they would require borrowers to pay off the liens before refinancing or selling their properties. The announcements, which raised concerns that borrowers would have to pay off their mortgages early, led most municipalities to suspend their PACE programs.”
~ Source: Online.WSJ.com

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