FHFA Weighs More Forceful Action on ‘Continued Threat’ of PACE Loans

Building on previous warnings about risks associated with home retrofitting loans financed through tax assessments, the Federal Housing Finance Agency is requesting public input on additional steps to deal with the “continued threat” that these loans pose to homeowners and the housing finance system.

The controversial Property Assessed Clean Energy, or PACE, loans for energy-efficient retrofitting—such as solar panels and high-efficiency air conditioners—often take lien priority over existing and subsequent first mortgage liens. FHFA has warned since 2014 that GSEs Fannie Mae and Freddie Mac cannot buy mortgages on homes with a first-lien PACE loan attached to it, yet PACE loans still “present a threat to the quality and stability of large amounts of [GSE] loans,” the agency said.

Specifically, FHFA asked whether it should direct the GSEs to reduce loan-to-value ratios or increase loan-level price adjustments on new loan purchases in states or localities where PACE loans are available, and if so, by how much and for what loans. (FHFA noted that the GSEs had more than 5.4 million mortgages with unpaid principal totaling $1.18 trillion in California and Florida, the two most active residential PACE jurisdictions.)

FHFA also asked for input on other actions it could take regarding GSE purchase and servicing requirements and standards for eligible Federal Home Loan Bank advance collateral in PACE loan jurisdictions, as well as how the GSEs can best obtain information about PACE liens, which FHFA noted are often hard to find due to where and how they are recorded. While the Consumer Financial Protection Bureau is currently in a congressionally mandated rulemaking process to apply the Truth in Lending Act’s ability-to-repay requirements and civil liability provisions to PACE loans, FHFA asked for additional input on the effects of PACE loans on consumers. Responses to FHFA are due by March 16.