FHFA: GSEs Cannot Support First-Lien PACE Programs

In testimony before the California legislature today, the Federal Housing Finance Agency reiterated that it cannot support first-lien property-assessed clean energy programs for participation by Fannie Mae and Freddie Mac. PACE programs — which currently operate in 30 states – allow municipalities to provide financing for energy-efficient retrofitting through property tax assessment, which gives the liens so-called super-priority over the first-lien mortgage holder.

FHFA pointed out that the PACE programs principally takes property value into consideration to support a loan, rather than the homeowner’s ability to repay, and that the loans have no enforcement agency behind them to ensure consumer protection standards. Given that, and the excessive risk posed by the “super-lien” status of PACE liens, FHFA has previously warned that the GSEs cannot buy mortgages on homes with first-lien PACE loans attached to them.

“Super-priority liens ahead of [GSE] loans transfer undue risk and only true second-lien status avoids this problem,” FHFA said. “Permitting a hidden or future lien to defeat or impair recourse to collateral — the basis for secured lending — has market implications.” ABA and other housing groups have previously expressed similar concerns about the risks that the PACE program and other attempts to place super-priority liens could have on consumers and the housing market overall. Read FHFA’s testimony.