Comment Detail

Comment

16 March 2020

Federal Housing Finance Agency (FHFA)
400 Seventh Street SW, Eighth Floor
Washington, DC 20219

Re: PACE Request for Input, Notice No. 2020-N-1

To whom it may concern:

This correspondence is in reference to the request for input (RFI) regarding Property Assessed Clean Energy (PACE) loans and associated programs, reflecting its use in the residential marketplace. There is a dynamic tension between the objectives being pursued via PACE financing, namely the laudable goal of upgrading the energy efficiency of homes, set against the burdensome encumbrance that is afforded to the PACE lender, namely having “super-priority” lien status over the mortgage. The Tahoe Sierra Board of Realtors® (TSBOR) has long advocated for voluntary incentive-based energy efficiency upgrades to existing residential structures. This program objective has expanded to include home “hardening” measures to better protect structures from the devastation exacted by wildfires. When originally introduced, we had hoped that the PACE program would provide a viable avenue for all interested homeowners to engage in environmentally responsible energy upgrades and retrofitting, ultimately saving the homeowner money over the long term as the energy savings accrue. However, in practice we have found that first priority for payout, even above the standing of the first/original mortgage, has been a serious impediment to the resale of homes with such PACE liens attached. While often “sold” to homeowners as a loan that will “run with the property”, in practice these loans are often viewed as a liability rather than an asset during home re-sales. Generally, the owner has been required to retire the PACE loan before mortgage lenders will consider backing such sales, including but not necessarily limited to federally backed mortgages (e.g., Fannie Mae, Freddie Mac, Federal Home Loan Banks, FHA....). As such, this creates a substantive consumer protection issue, as well as discovery and disclosure hurdles to overcome. If there is a potential “fatal flaw” associated with the PACE program as seen in California, it is perhaps in affording it “super-lien” status. Perhaps the best way to protect all concerned would be a legislative remedy that specifically subordinates PACE loans to the mortgage and taxes owed to the state; furthermore, that such a legislative remedy also articulate that PACE encumbrances are subordinated to any local general taxes or special assessments that were approved by the voters of a subdivision of state government (i.e., a city, county, and/or special district).

It is understood that FHFA and other federal fiduciaries must take prudent precautions to protect the public’s money that is applied to these ventures. However, please remain mindful that any action that FHFA might take to attempt to offset the potential liability associated with PACE-encumbered properties must be set against the already significant barriers in place to the provision of affordable and accessible homeownership opportunities in high-cost areas such as ours. We have an insufficient stock of housing to meet the need, and the stock that is available is difficult for the average family to afford/qualify to buy. As such, no action that might be under consideration by FHFA should apply in a blanket fashion to all residential properties in a given area or jurisdiction. The above mentioned statements apply to questions 1, 2, and 4 within the Request for Input (RFI). In short, don’t lower the buying power of the many because of the actions of a few.

Specifically, as suggested in adjusting loan-to-value ratios to reflect the potential for added PACE loan encumbrances in jurisdictions which allow for PACE loans to be secured (Q. 1)- this approach would have a direct and adverse impact upon all purchasers in our region, when only a few PACE loans are actually in-place within a given jurisdiction. Understanding that FHFA must assess all risk, existent and potential; it is equally important that FHFA does not undermine its housing mission by introducing measures that would further reduce the number of eligible participants. The same general philosophy applies to Question 2 of the RFI, considering Loan Level Price Adjustments. While some arguments could be made for the prudence of LLPAs or other credit enhancements for properties in jurisdictions which participate in the PACE program, the net effect would still be to reduce the number of otherwise qualified/eligible families to secure adequate mortgage funding to purchase a home. Question 4 of the RFI has all of the same flaws of over-reach, punishing all borrowers because of the actions of a few who participate in PACE. The affordability gap, the chasm between the median price for a home in our region, set against the AMI – Area Median Income, is significant and difficult enough to overcome under current conditions. Adding to this burden, widening this chasm, is inappropriate and out-of-step with your overarching mission objectives of creating housing financing opportunities for more Americans. Thus, the measures under consideration in questions 1, 2, and 4 of the RFI should be rejected.

Questions 5, 6, 7, 8 and 9 of the Request for Input (RFI) all deal with aspects of transparency, as does question 3 in some respects. These are important topics for all, be it borrowers, lenders, FHFA, or others involved in real property transactions. A home purchase is, for many families, the largest single expenditure and investment they will make. We are strong proponents for consumer protections in this regard, among others. Standardized and strengthened consumer education and disclosure requirements are necessary and warranted. Rather than punish all potential mortgage holders and purchasers for the mere presence of a PACE program (i.e., available, but not imposed on a given property), it is far superior to strengthen consumer education and protections across the board. This can be done in large measure via standardized and rigorous disclosure requirements for all involved in a PACE program.

Additionally, as noted in some of the above-mentioned RFI questions, identifying and tracking PACE encumbrances upon real property is another transparency concern. Again, a system that affords the average consumer as well as the investor/lender the opportunity to easily identify the type of encumbrance on a given property, and the particulars of that encumbrance (e.g., type – PACE; lien position if in default/foreclosure – “Super-Priority” or first position; improvement(s) in-place financed by PACE - solar panels, low flow water fixtures...; total cost - $ x; interest rate – x %; amount of total cost outstanding as of x quarter – x $; pay-off period – x months or x years...), would greatly assist all in the discovery and understanding of these loan products. While personal information must be guarded/protected, real property information such as the foregoing could be entered as an APN – Assessor’s Parcel Number and/or by street address. If the format and location were to be standardized to the extent possible, ease of access should result in more informed consumers, and by extension lenders will have an easier time identifying and quantifying the liability or asset status associated with such a real property improvement financed via a PACE program.

In closing, we reiterate our general policy in favor of voluntary and incentive-based real property retrofits or improvements, as opposed to governmentally mandated retrofits. We are especially opposed to so-called point-of-sale (prior to the close of escrow) government mandated retrofits, for they are inefficient, ineffective, and lack equity in application. As such, the underlying concept embodied in the Property Assessed Clean Energy (PACE) program is
laudable, in that it affords the homeowner an option to finance a needed retrofit or improvement to one’s home. In practice, the potential pitfalls embedded such a program are many, including giving such loans “super-priority” standing in cases of foreclosure, ahead of the original mortgage and other legitimate real property encumbrances or tax liabilities. Another pertinent concern is the accessibility or transparency of such PACE loans. The inability of many to easily access and identify the nature and scope of such a loan on a given residential property is of great concern, not only for lenders but also for potential buyers of property that has been so encumbered. How and where PACE loans are recorded is consequential in regard to how easy or difficult it can be to determine if such loans are attached to a given parcel (i.e., recorded in tax records but not necessarily in land title records). Indeed, the lack of transparency is a significant consumer protection issue, for some homeowners have complained that they were not fully informed of the potential impediment such a loan could have upon future resale of the property, especially when the mortgage being pursued by the potential buyer is backed by a federal program such as those under FHFA and FHA. Two complimentary federal and state policy tracks could serve to address the majority of the issues or concerns, namely a legislative (or equivalent) remedy to the inappropriate placement of a PACE loan ahead of the mortgage, and a rigorous standardized consumer education and disclosure package to ensure that potential PACE participants fully understand how such loans impact personal budgeting, credit worthiness, as well as resale of real property. The consumer should also be made aware the availability of a range of alternative financing options, some of which may offer more attractive interest rates, repayment options, or other consumer considerations. While FHFA appropriately seeks to limit the potential liability or risk associated with such add-on encumbrances, it is equally important to ensure that FHFA policy setting or rulemaking does not inappropriately punish all those seeking a federally backed mortgage in a jurisdiction that has a PACE program in place, irrespective of whether the property in question is so encumbered. The availability and affordability of mortgages must not be further limited by the mere fact that PACE programs exist.

Sincerely,
s/ John R. Falk
John R. Falk, Legislative Advocate
Governmental & Public Policy Consulting
On behalf of the Tahoe Sierra Board of Realtors®, Inc.