Energy efficient remodeling PACE program may be dead on arrival

The White House's effort to encourage energy efficient remodeling through the Property Assessed Clean Energy (PACE) program may not be getting far, with Fannie Mae and Freddie Mac expressing their opposition.

PACE would help homeowners make the improvements by allowing them to borrow money from local municipalities, then repay the cities, which would fund the program through the sale of municipal bonds. The problem mortgage lenders have with the deal is that those liens would become senior.

The Wall Street Journal's Development Blog has more details:

In somewhat-cryptic letters that Fannie and Freddie sent to lenders earlier this month, the companies reminded banks that their agreements don’t allow them to purchase loans that have a senior lien. “An energy-related lien may not be senior to any Mortgage delivered to Freddie Mac,” the company said. Both firms said they would provide “additional guidance” if the PACE programs move beyond the “experimental stage.”

The letters suggest that Fannie and Freddie won’t allow borrowers with a PACE lien to refinance or sell their properties unless the liens are paid off. Proponents say the liens need to be senior or they won’t attract sufficient interest from bond investors. The Department of Energy, meanwhile, issued revised guidelines for municipalities that use the program.

This makes perfect sense. With all the foreclosures these days, why would any lender want to accept this deal? Unfortunately, this will probably end up shooting any chance of a large-scale program of energy-efficient loans.