‘Property Assessed Clean Energy’ (PACE) bonds can be issued by municipal financing districts or finance companies, with the proceeds lent to property owners to help pay for energy retrofits (efficiency measures and small renewable energy systems). Owners repay their loans over 20 years through a special tax added to their property tax bills, with property tax liens senior to mortgage debt and in the first position to be repaid, in the event a home goes into foreclosure.

A two-year nationwide trial programme expected to use an as-yet-undetermined portion of more than $500 million in Recovery Act funds was set to begin this month.

But PACE bonds were dealt a major blow last week when the Federal Housing Finance Agency (FHFA) upheld a determination by mortgage giants Fannie Mae and Freddie Mac that they must be subordinate to their own mortgages. “First liens for such loans represent a key alteration of traditional mortgage lending practice,” the regulator said.

Fannie Mae and Freddie Mac together own or guarantee about half of all residential home mortgages in the US and also purchase home loans from banks and other lenders. Because of the two firms' substantial market share, lenders will not issue mortgages that do not meet their requirements, essentially shutting down residential PACE programmes, according to a lawsuit filed by California Attorney General Jerry Brown.

FHFA urged state and local governments to reconsider PACE programmes and called for a pause in their expansion so these issues can be addressed.

Several proposals were offered to mitigate the stated concerns associated with PACE programmes, including a cap on the size of the trial programme and a rules revision that would reduce the potential cost to below $200 per home by only allowing past-due payments to be paid senior to the mortgage for houses in foreclosure.

President Barack Obama’s administration determined that the risk posed to lenders was so low that it offered a full guarantee that any loss would be covered by the federal government. However, regulators rejected it out of hand, said Cisco DeVries, pioneer of the PACE concept and the president of Renewable Funding in San Francisco, California.

“They are trying to kill PACE,” he said. “That’s their intent.”

FHFA ordered Fannie Mae, Freddie Mac and the Federal Home Loan Banks to ensure that loan covenants require approval for any PACE loan and tighten borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans, among other actions. But PACE supporters argue that these actions will result in the mortgage giants treating PACE financing as mortgage defaults and imposing additional borrower requirements in PACE communities that are prohibitively expensive.

Local officials are fighting back against what they consider an egregious usurpation of the long-standing authority of local governments over property tax assessments. Brown filed a lawsuit yesterday against Fannie Mae and Freddie Mac for ignoring California law by wrongly characterising PACE assessments as loans that must be subordinate to their own mortgages.

The Sonoma County Board of Supervisors decided to keep its programme open for new applications and directed its staff to continue working with Congress and the Obama administration to overturn the lending guidelines. The county’s programme, the largest in the US, has financed 1,046 projects to the tune of more than $34.5 million.

The infringement on states’ rights has outraged legislators on both sides of the aisle and spurred a push for federal legislation to allow the trial programme to move forward, said Jeff Tannenbaum, founder of PACENOW. But time is of the essence with Congress due to break for the August recess in three weeks and a 30 September deadline for programmes to receive Recovery Act funds. “There’s not a lot of time right now,” he said.

Gloria Gonzalez