In a 26 August letter to Congressman Ed Perlmutter, the Federal Housing Finance Agency (FHFA) said it has significant concerns with Property Assessed Clean Energy (PACE) bonds – designed to be issued by municipalities, with revenues channelled to property owners to help pay for energy retrofits. The programmes provide loans that are paid back via annual property tax assessments. 

FHFA in July upheld a determination by mortgage giants Fannie Mae and Freddie Mac that PACE bond repayments must be subordinate to their own mortgages in the event of foreclosure, which has essentially shuttered PACE programmes across the US.

In its letter, the regulator outlined its objections to PACE programmes: that the state-by-state and locality-by-locality implementation do not allow for uniform standards for consumer protections and appropriate underwriting, and that they pose a threat to the agency’s regulated entities.

Agency representatives worked with Perlmutter’s staff, state and local government officials, and other federal regulators to examine potential modifications. But FHFA said no solution has been found to address the problems associated with liens created after a mortgage is in place, thereby transferring credit risk to banks, secondary market parties and investors in mortgage-backed securities.

“FHFA, therefore, has determined that its guidance to its regulated entities must remain in place,” the regulator said in the letter.

The agency said it supports energy retrofit lending programmes and pledged to continue to work on alternative lending structures with its regulated entities and other regulators that do not pose the risks of PACE programmes.

Gloria Gonzalez