Item 4a July 23, 2014

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1 Item 4a July 23, 2014 Energy Commission ACTION CALENDAR July 23, 2014 To: From: Subject: Berkeley Energy Commission Neal De Snoo, Commission Secretary Property Assessed Clean Energy Loans ISSUE FOR CONSIDERATION Should the City Council authorize the HERO Property Assessed Clean Energy (PACE) loan program? FISCAL IMPACTS The financial impacts to the City would be relatively small and will be limited to existing staff time to post information about the program on the City s website and monitor uptake. CURRENT SITUATION AND ITS EFFECTS On May 1, 2014, the Federal Housing Finance Agency (FHFA) reiterated its 2010 position that PACE loans present a risk to mortgage lenders and its prohibition against Fannie Mac and Freddie Mae purchasing or refinancing mortgages with senior PACE loans. Fannie Mae and Freddie Mac underwrite conforming loans, i.e., non-jumbo loans. There are at least four residential PACE loan programs in California, including the CaliforniaFIRST program, which Council authorized in 2010 and the HERO program, which Council referred to staff to consider for authorization. No residential PACE loans have been issued in Berkeley since the FHFA stated its position on PACE loans in BACKGROUND PACE programs provide financing for renewable energy installations, energy and water efficiency improvements and electric vehicle charging infrastructure on private properties. Property owners repay the cost of the financing on their property tax bills. In 2010, the FHFA issued a statement directing Fannie Mae and Freddie Mac to take actions that would place restrictions on mortgages for properties with PACE loans. Fannie Mae and Freddie Mac are quasi-public entities that underwrite conforming residential mortgages. Such conforming loans range from $625,500 for a one unit building to $1,202,925 for a four-unit building. Loans in excess of this amount, i.e., jumbo loans, are not subject to Fannie Mae and Freddie Mac underwriting rules Milvia Street, Berkeley, CA Tel: (510) TDD: (510) Fax: (510) Website:

2 Property Assessed Clean Energy Loans Item 4a July 23, 2014 The actions that the FHFA directed include requiring PACE loans be paid off prior to sale or refinancing, requiring mortgage holders to obtain approval before assuming a PACE loan, and adjusting loan-to-value ratios and tightening debt-to-income ratios in jurisdictions that authorize PACE. The actions would have greater effects on affordable housing, which more commonly participate in conforming loans. The implications are summarized below. A PACE client could be required to pay off the PACE loan prior to refinancing. This is now in practice, but not always enforced. A mortgagee who obtained a PACE loan without approval from their mortgage company could be held in default of their loan and required to repay it immediately. There are no known instances of this happening. All conforming loans within a community that authorizes PACE loans would be subject to more restrictive terms the community could be redlined. There are no known instances of this happening. Staff is not aware of lenders calling an existing loan in default or of redlining a community because of PACE. To date, the only action taken by lenders has been to require that PACE loans be paid upon sale or refinancing existing mortgages and both the CaliforniaFIRST and HERO programs include disclosures to this effect. In an attempt to protect PACE borrowers and PACE communities, the State of California established the Property Assessed Clean Energy (PACE) Loss Reserve Program. The new reserve will underwrite residential loans from participating PACE providers with a.25% fee on new PACE loans. The Program would compensate first mortgage lenders for losses attributable to PACE loans. The establishment of the program resulted in a decision by the California Statewide Communities Development Authority (CSCDA) to reestablish the California FIRST residential PACE program, which is already authorized to serve Berkeley ( FHFA Secretary Mel Watt stated in a May 1, 2014 letter that the loss reserve program fails to offer loss protection to Fannie Mae and Freddie Mac and that the FHFA will continue to prohibit the Enterprises [Fannie Mae and Freddie Mac] from purchasing or refinancing mortgages that are encumbered with first-lien PACE loans. The letter did not reference the other sanctions mentioned in the 2010 statement. Similarly, in August 2013, the FHFA sent a letter to the City of San Diego stating that it had directed lenders not to purchase original loans or re-finance loans secured by properties that have a first lien PACE obligation attached. Again, the letter makes no reference to the other sanctions mentioned in the 2010 statement. Given the FHFA s recent communications, it appears that the agency is signaling that it would not impose sanctions other than requiring that PACE loans be repaid upon sale or refinancing.

3 Property Assessed Clean Energy Loans Item 4a July 23, 2014 Other PACE programs, including the HERO program, have been in operation since the FHFA s original statement was issued and have no plans to discontinue. HERO and CaliforniaFIRST are governed by joint powers authorities established by public agencies. There are other private companies offering PACE loans as well. ENVIRONMENTAL SUSTAINABILITY Participation in PACE programs directly supports the City s climate action goals by stimulating investments that will reduce carbon emissions and reduce water consumption. RATIONALE FOR RECOMMENDATION Current FHFA practices and recent FHFA communications lead to the conclusion that the risks to existing mortgage holders are known and manageable. Nevertheless, it is important to consider that the FHFA has the authority to impose more severe sanctions and that these risks would apply to lower value conforming loans and could disproportionately affect moderate and low-income households. The benefits, meanwhile are significant and could provide much needed capital for residential improvements, reduce community energy costs and greenhouse gas emissions and stimulate employment. ALTERNATIVE ACTIONS CONSIDERED The City could authorize the HERO program. The City could also authorize the privately administered PACE programs. However, unlike the California FIRST and HERO programs, there is no direct public oversight of these programs. Or, the existing CaliforniaPACE program could be deauthorized. Attachments: 1: FHFA Letter to Governor Brown, May 1, : FHFA Letter to the City of San Diego, July 24, : FHFA Statement on Certain Energy Retrofit Loans, July 6, 2010

4 FEDERAL HOUSING FINANCE AGENCY Office of the Director May 1, 2014 The Honorable Edmund G. Brown Jr. Governor, State of California State Capitol Sacramento, CA RE: California Property Assessed Clean Energy Program Dear Governor Brown: Thank you for your letter of April 28,2014 about California's Property Assessed Clean Energy (PACE) program. The Federal Housing Finance Agency's (FHFA) General Counsel has been in touch with your staff, and I appreciate the time and materials they have provided concerning California's PACE program and intentions in creating the Reserve Fund. I am writing to inform you that FHFA is not prepared to change its position on California's first-lien PACE program and will continue to prohibit the Enterprises from purchasing or refinancing mortgages that are encumbered with first-lien PACE loans. California's PACE program would allow local governments to finance energy-related home improvement projects by placing an assessment on a homeowner's property in a first lien position, resulting in the subordination of an existing Enterprisebacked mortgage to a second lien position. The effect of this is to increase the risks and possibility of losses to the Enterprises. Additionally, because these loans run with the land, the ongoing monthly assessments for PACE loans are passed on to any subsequent property owners - including after a foreclosure or other distressed sale - unless fully paid off beforehand. In making this determination, FHFA has carefully reviewed the Reserve Fund created by the State of California and, while I appreciate that it is intended to mitigate these increased losses, it fails to offer full loss protection to the Enterprises. The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability. Should you wish to discuss this matter further, I would be happy to discuss alternatives to first-lien PACE programs with you. Melvin L. Watt xc: The Honorable Barbara Boxer The Honorable Zoe Lofgren 400 7th Street, S.W., Washington, D.C (fax)

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7 FEDERAL HOUSING FINANCE AGENCY STATEMENT For Immediate Release Contact: Corinne Russell (202) July 6, 2010 Stefanie Mullin (202) FHFA Statement on Certain Energy Retrofit Loan Programs After careful review and over a year of working with federal and state government agencies, the Federal Housing Finance Agency (FHFA) has determined that certain energy retrofit lending programs present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Specifically, programs denominated as Property Assessed Clean Energy (PACE) seek to foster lending for retrofits of residential or commercial properties through a county or city s tax assessment regime. Under most of these programs, such loans acquire a priority lien over existing mortgages, though certain states have chosen not to adopt such priority positions for their loans. First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors. The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives. FHFA urged state and local governments to reconsider these programs and continues to call for a pause in such programs so concerns can be addressed. First liens for such loans represent a key alteration of traditional mortgage lending practice. They present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities and are not essential for successful programs to spur energy conservation. While the first lien position offered in most PACE programs minimizes credit risk for investors funding the programs, it alters traditional lending priorities. Underwriting for PACE programs results in collateral-based lending rather than lending based upon ability-to-pay, the absence of Truth-in-Lending Act and other consumer protections, and uncertainty as to whether the home improvements actually produce meaningful reductions in energy consumption. Efforts are just underway to develop underwriting and consumer protection standards as well as energy retrofit standards that are critical for homeowners and lenders to understand the risks and rewards of any energy retrofit lending program. However, first liens that disrupt a fragile housing finance market and long-standing lending priorities, the absence of robust underwriting standards to protect homeowners and the lack of energy retrofit standards to assist homeowners, appraisers, inspectors and lenders determine the value of retrofit products combine to raise safety and soundness concerns.

8 On May 5, 2010, Fannie Mae and Freddie Mac alerted their seller-servicers to gain an understanding of whether there are existing or prospective PACE or PACE-like programs in jurisdictions where they do business, to be aware that programs with first liens run contrary to the Fannie Mae-Freddie Mac Uniform Security Instrument and that the Enterprises would provide additional guidance should the programs move beyond the experimental stage. Those lender letters remain in effect. Today, FHFA is directing Fannie Mae, Freddie Mac and the Federal Home Loan Banks to undertake the following prudential actions: 1. For any homeowner who obtained a PACE or PACE-like loan with a priority first lien prior to this date, FHFA is directing Fannie Mae and Freddie Mac to waive their Uniform Security Instrument prohibitions against such senior liens. 2. In addressing PACE programs with first liens, Fannie Mae and Freddie Mac should undertake actions that protect their safe and sound operations. These include, but are not limited to: - Adjusting loan-to-value ratios to reflect the maximum permissible PACE loan amount available to borrowers in PACE jurisdictions; - Ensuring that loan covenants require approval/consent for any PACE loan; - Tightening borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans; - Ensuring that mortgages on properties in a jurisdiction offering PACE-like programs satisfy all applicable federal and state lending regulations and guidance. Fannie Mae and Freddie Mac should issue additional guidance as needed. 3. The Federal Home Loan Banks are directed to review their collateral policies in order to assure that pledged collateral is not adversely affected by energy retrofit programs that include first liens. Nothing in this Statement affects the normal underwriting programs of the regulated entities or their dealings with PACE programs that do not have a senior lien priority. Further, nothing in these directions to the regulated entities affects in any way underwriting related to traditional tax programs, but is focused solely on senior lien PACE lending initiatives. FHFA recognizes that PACE and PACE-like programs pose additional lending challenges, but also represent serious efforts to reduce energy consumption. FHFA remains committed to working with federal, state, and local government agencies to develop and implement energy retrofit lending programs with appropriate underwriting guidelines and consumer protection standards. FHFA will also continue to encourage the establishment of energy efficiency standards to support such programs. ### The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. These government-sponsored enterprises provide more than $5.9 trillion in funding for the U.S. mortgage markets and financial institutions.

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