Mortgage Assets Affected by PACE Programs, 3958-3964 [2012-1345]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 77, Number 17 (Thursday, January 26, 2012)]
[Proposed Rules]
[Pages 3958-3964]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1345]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1254

RIN 2590-AA53


Mortgage Assets Affected by PACE Programs

AGENCY: Federal Housing Finance Agency.

ACTION: Advance notice of proposed rulemaking; request for comments; 
Notice of intent to prepare environmental impact statement; request for 
scoping comments.

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SUMMARY: The Federal Housing Finance Agency (``FHFA'') hereby issues 
this Advance Notice of Proposed Rulemaking (``ANPR'') concerning 
mortgage assets affected by Property Assessed Clean Energy (``PACE'') 
programs and Notice of Intent (``NOI'') to prepare an environmental 
impact statement (``EIS'') under the National Environmental Policy Act 
(``NEPA'') to address the potential environmental impacts of FHFA's 
proposed action.
    The United States District Court for the Northern District of 
California issued a preliminary injunction ordering FHFA ``to proceed 
with the notice and comment process'' in adopting guidance concerning 
mortgages that are or could be affected by PACE programs. Specifically, 
the California District Court ordered FHFA to ``cause to be published 
in the Federal Register an Advance Notice of Proposed Rulemaking 
relating to the statement issued by FHFA on July 6, 2010, and the 
letter directive issued by FHFA on February 28, 2011, that deal with 
property assessed clean energy (PACE) programs.''
    In response to and compliance with the California District Court's 
order, FHFA is seeking comment on whether the restrictions and 
conditions set forth in the July 6, 2010 Statement and the February 28, 
2011 Directive should be maintained, changed, or eliminated, and 
whether other restrictions or conditions should be imposed. FHFA has 
appealed the California District Court's order to the U.S. Court of 
Appeals for the Ninth Circuit (the ``Ninth Circuit''). Inasmuch as the 
California District Court's order remains in effect pending the outcome 
of the appeal, FHFA is proceeding with the publication of this ANPR and 
NOI pursuant to that order. The Ninth Circuit has stayed, pending the 
outcome of FHFA's appeal, the portion of the California District 
Court's Order requiring publication of a final rule. FHFA reserves the 
right to withdraw this ANPR and NOI should FHFA prevail in its appeal, 
and may in that situation continue to address the financial risks FHFA 
believes PACE programs pose to safety and soundness through means other 
than notice-and-comment rulemaking.

DATES: Written comments must be received on or before March 26, 2012.

ADDRESSES: You may submit your comments, identified by regulatory 
information number (RIN) 2590-AA53, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov: 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at RegComments@fhfa.gov to ensure timely receipt by FHFA. 
Please include ``RIN 2590-AA53'' in the subject line of the message.

[[Page 3959]]

     Email: Comments to Alfred M. Pollard, General Counsel may 
be sent by email to RegComments@fhfa.gov. Please include ``RIN 2590-
AA53'' in the subject line of the message.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA53, Federal 
Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., 
Washington, DC 20024.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA53, 
Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., 
Washington, DC 20024. The package should be logged at the Seventh 
Street entrance Guard Desk, First Floor, on business days between 9 
a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel, 
(202) 649-3050 (not a toll-free number), Federal Housing Finance 
Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC 20024. The 
telephone number for the Telecommunications Device for the Hearing 
Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of this ANPR and NOI. 
Commenters should identify by number, the question each of their 
comments addresses. Copies of all comments will be posted without 
change, including any personal information you provide, such as your 
name and address, on the FHFA Web site at https://www.fhfa.gov. In 
addition, copies of all comments received will be available for 
examination by the public on business days between the hours of 10 a.m. 
and 3 p.m. at the Federal Housing Finance Agency, Eighth Floor, 400 
Seventh Street SW., Washington, DC 20024. To make an appointment to 
inspect comments, please call the Office of General Counsel at (202) 
649-3804.

II. Background

A. FHFA's Statutory Role and Authority as Regulator

    FHFA is an independent federal agency created by the Housing and 
Economic Recovery Act of 2008 (HERA) to supervise and regulate the 
Federal National Mortgage Association (Fannie Mae), the Federal Home 
Loan Mortgage Corporation (Freddie Mac), (together, the Enterprises), 
and the Federal Home Loan Banks (the ``Banks''). FHFA is the exclusive 
supervisory regulator of the Enterprises and the Banks. Both 
Enterprises are presently in conservatorship under the direction of 
FHFA as Conservator. 12 U.S.C. 4501 et seq. Congress established FHFA 
in the wake of a national crisis in the housing market. A key purpose 
of HERA was to create a single federal regulator with all of the 
authority necessary to oversee Fannie Mae, Freddie Mac, and the Banks. 
12 U.S.C. 4511(b)(2).
    Fannie Mae and Freddie Mac operate in the secondary mortgage 
market. Accordingly, they do not directly lend funds to home 
purchasers, but instead buy mortgage loans from original lenders, 
thereby providing funds those entities can use to make additional 
loans. The Enterprises hold in their own portfolios a fraction of the 
mortgage loans they purchase. The Enterprises also securitize a 
substantial fraction of the mortgage loans they purchase, packaging 
them into pools and selling interests in the pools as mortgage-backed 
securities. Traditionally, the Enterprises guarantee nearly all of the 
mortgage loans they securitize. Together, the Enterprises own or 
guarantee more than $5 trillion in residential mortgages.
    FHFA's ``Director shall have general regulatory authority over each 
[Enterprise] * * *, and shall exercise such general regulatory 
authority * * * to ensure that the purposes of this Act, the 
authorizing statutes, and any other applicable law are carried out.'' 
12 U.S.C. 4511(b)(2). As regulator, FHFA is charged with ensuring that 
the Enterprises operate in a ``safe and sound manner.'' 12 U.S.C. 
4513(a). FHFA is statutorily authorized ``to exercise such incidental 
powers as may be necessary or appropriate to fulfill the duties and 
responsibilities of the Director in the supervision and regulation'' of 
the Enterprises. 12 U.S.C. 4513(a)(2). FHFA's Director is authorized to 
``issue any regulations or guidelines or orders as necessary to carry 
out the duties of the Director * * *.'' Id. 4526(a). FHFA's regulations 
are subject to notice-and-comment rulemaking under the Administrative 
Procedure Act.

B. FHFA's Statutory Role and Authority as Conservator

    HERA also authorizes the Director of FHFA to ``appoint the Agency 
as conservator or receiver for a regulated entity * * * for the purpose 
of reorganizing, rehabilitating or winding up [its] affairs.'' Id. 
4617(a)(1), (2). On September 6, 2008, FHFA placed Fannie Mae and 
Freddie Mac into conservatorships. FHFA thus ``immediately succeed[ed] 
to all rights, titles, powers, and privileges of the shareholders, 
directors, and officers of the [Enterprises].'' Id. 4617(b)(2)(B).
    In its role as Conservator, FHFA may take any action ``necessary to 
put the regulated entity into sound and solvent condition'' or 
``appropriate to carry on the business of the regulated entity and 
preserve and conserve the assets and property of the regulated 
entity.'' Id. 4617(b)(2)(D). The Conservator also may ``take over the 
assets of and operate the regulated entity in the name of the regulated 
entity,'' ``perform all functions of the entity'' consistent with the 
Conservator's appointment, and ``preserve and conserve the assets and 
property of the regulated entity.'' Id. 4617(b)(2)(A), (B). The 
Conservator may take any authorized action ``which the Agency 
determines is in the best interests of the regulated entity or the 
Agency.'' Id. 4617(b)(2)(J). ``The authority of the Director to take 
actions [as Conservator] shall not in any way limit the general 
supervisory and regulatory authority granted'' by HERA. 12 U.S.C. 
4511(c).

C. Issues Relating to PACE Programs That Are Relevant to FHFA's 
Supervision and Direction of the Enterprises

    PACE programs provide a means of financing certain kinds of home-
improvement projects. Specifically, PACE programs permit local 
governments to provide financing to property owners for the purchase of 
energy-related home-improvement projects, such as solar panels, 
insulation, energy-efficient windows, and other products. Homeowners 
repay the amount borrowed, with interest, over a period of years 
through ``contractual assessments'' added to their property tax bill. 
Over the last three years, more than 25 states have passed legislation 
authorizing local governments to set up PACE-type programs. Such 
legislation leaves most program implementation and standards to local 
governmental bodies and provides no uniform requirements or enforcement 
mechanisms.
    In most, but not all, states that have implemented PACE programs, 
the liens that result from PACE program loans have priority over 
mortgages, including pre-existing first mortgages.\1\ In such programs, 
the PACE lender ``steps ahead'' of the mortgage holder (e.g., a Bank, 
Fannie Mae, or Freddie Mac) in

[[Page 3960]]

priority of its claim against the collateral, and such liens ``run'' 
with the property. As a result, a mortgagee foreclosing on a property 
subject to a PACE lien must pay off any accumulated unpaid PACE 
assessments (i.e., past-due payments) and remains responsible for the 
principal and interest payments that are not yet due (i.e., future 
payments) on the PACE obligation. Likewise, if a home is sold before 
the homeowner repays the city or county, the purchaser of the home 
assumes the obligation to pay the remainder. The mortgage holder is 
also at risk in the event of foreclosure for any diminution in the 
value of the property caused by the outstanding lien or the retrofit 
project, which may or may not be attractive to potential purchasers. 
Also, the homeowner's assumption of this new obligation may itself 
increase the risk that the homeowner will become delinquent or default 
on other financial obligations, including any mortgage obligations.\2\
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    \1\ In at least four states--Maine, New Hampshire, Oklahoma, and 
Vermont--legislation provides that the PACE lien does not 
subordinate a first mortgage on the subject property. FHFA 
understands that under legislation now pending in Connecticut, PACE 
programs in that state also would not subordinate first mortgages.
    \2\ In many PACE programs, the allowable amount of a loan is 
based on assessed property value and may not consider the borrower's 
ability to repay. States have considered permitting loan levels of 
10% to 40% of the assessed value of the underlying property.
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    Typically, PACE programs serve as a channel through which private-
sector capital flows through the local government to the homeowner-
borrower (or the homeowner-borrower's contractors). While PACE programs 
vary in the particular mechanisms they use to raise capital, in many 
instances private investors provide the capital by purchasing bonds 
secured by the payments that homeowner-borrowers make on their PACE 
obligations. From the capital provider's perspective, one advantage of 
channeling the funding through a local government, rather than lending 
directly to the homeowner-borrower or channeling the funds through a 
private enterprise, is that the local government is able to use the 
property-tax assessment system as the vehicle for repayment. Because of 
the ``lien-priming'' feature of most PACE programs, the capital 
provider effectively ``steps ahead'' of all other private land-secured 
lenders (including mortgage lenders) in priority, thereby minimizing 
the financial risk to the capital provider while downgrading the 
priority of first and second mortgages, and of any other property-
secured financial obligation.
    Proponents of PACE programs have analogized the obligations to 
repay PACE loans to traditional tax assessments. However, unlike 
traditional tax assessments, PACE loans are voluntary--homeowners opt 
in, submit applications, and contract with the city or county's PACE 
program to obtain the loan. Each participating property owner controls 
the use of the funds, selects the contractor who will perform the 
energy retrofit, owns the energy retrofit fixtures and must repair the 
fixtures should they become inoperable, including during the time the 
PACE loan remains outstanding. Each locality sets its own terms and 
requirements for homeowner and project eligibility for PACE loans; no 
uniform national standards exist. Nothing in PACE requires that local 
governments adopt and implement nationally uniform financial 
underwriting standards, such as minimum total loan-to-value ratios that 
take into account either: (i) Total debt or other liens on the 
property; or (ii) the possibility of subsequent declines in the value 
of the property. Many PACE programs also do not employ standard 
personal creditworthiness requirements, such as limits on FICO score or 
total debt-to-income ratio, although some include narrower 
requirements, such as that the homeowner-borrower be current on the 
mortgage and property taxes and not have a recent bankruptcy history.
    Some local PACE programs communicate to homeowners that incurring a 
PACE obligation may violate the terms of their mortgage documents.\3\ 
Similarly, some cities and counties provide forms that participants can 
use to obtain the lender's consent or acknowledgment prior to 
participation.\4\
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    \3\ See, e.g., Yucaipa Loan Application at 2-3, 10, https://www.yucaipa.org/cityPrograms/EIP/PDF_Files/Application.pdf (last 
visited Jan. 12, 2012); Sonoma Application at 2, https://www.sonomacountyenergy.org/lower.php?url=reference-forms-new&catid=603 (document at ``Application'' link) (last visited Jan. 
12, 2012).
    \4\ Sonoma Lender Acknowledgement, https://www.sonomacountyenergy.org/lower.php?url= reference-forms-
new&catid=606 (pages 4-7 of document at ``Lender Info and 
Acknowledgement'' link) (last visited Jan. 12, 2012).
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    State legislation authorizing PACE programs gained notoriety in 
2008. As PACE programs were being considered by more states, FHFA began 
to evaluate their implementations and potential impact on the 
portfolios of FHFA-regulated entities. On June 18, 2009, FHFA issued a 
letter and background paper raising concerns about PACE programs that 
retroactively created first liens. To discuss the risks to lenders and 
the Enterprises as well as borrowers, FHFA met over the next year with 
PACE stakeholders, other federal agencies, and state and local 
authorities around the country.
    On May 5, 2010, in response to continuing questions about PACE 
programs, Fannie Mae and Freddie Mac issued advisories (``Advisories'') 
to lenders and servicers of mortgages owned or guaranteed by the 
Enterprises.\5\ The May 5, 2010 Advisories referred to Fannie Mae's and 
Freddie Mac's jointly developed master uniform security instruments 
(``USIs''), which prohibit liens senior to that of the mortgage.\6\
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    \5\ Fannie Mae Lender Letter LL-2010-06 (May 5, 2010), available 
at https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/ll1006.pdf; Freddie Mac Industry Letter (May 5, 2010), available at 
https://www.freddiemac.com/sell/guide/bulletins/pdf/iltr050510.pdf.
    \6\ The relevant provision appears in Section 4. See, e.g., 
Freddie Mac Form 3005, California Deed of Trust, available at https://www.freddiemac.com/uniform/doc/3005-CaliforniaDeedofTrust.doc; 
Fannie Mae Form 3005, California Deed of Trust, available at https://www.efanniemae.com/sf/formsdocs/documents/secinstruments/doc/3005w.doc.
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    Shortly after the May 5, 2010 Advisories were issued, FHFA received 
a number of inquiries seeking FHFA's position.\7\ On July 6, 2010, FHFA 
issued the Statement, which provides:
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    \7\ Letter from Edmund G. Brown, Jr. to Edward DeMarco (May 17, 
2010); Letter from Edmund G. Brown, Jr. to Edward DeMarco (June 22, 
2010).

    [T]he 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. * * *
    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. 
* * *
    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.\8\
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    \8\ FHFA Statement on Certain Energy Retrofit Loan Programs 
(July 6, 2010), available at https://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdf.

The Statement directed that the May 5, 2010 Advisories ``remain in 
effect'' and that the Enterprises ``should undertake prudential actions 
to protect their operations,'' including: (i) Adjusting loan-to-value 
ratios; (ii) ensuring that loan covenants require approval/consent for 
any PACE loans; (iii) tightening borrower debt-to-income ratios; and, 
(iv) ensuring that mortgages on properties with PACE liens satisfy all 
applicable federal and state lending regulations. However, FHFA 
directed these actions on a prospective basis only, directing in the 
Statement that any prohibition against such liens in the Enterprises' 
USIs be waived as to PACE obligations already in existence as of July 
6, 2010.
    On February 28, 2011, the Conservator issued a directive stating 
the Agency's view that PACE liens

[[Page 3961]]

``present significant risks to certain assets and property of the 
Enterprises--mortgages and mortgage-related assets--and pose unusual 
and difficult risk management challenges.'' FHFA thus directed the 
Enterprises to ``continue to refrain from purchasing mortgage loans 
secured by properties with outstanding first-lien PACE obligations.'' 
Id. In all its statutory capacities, FHFA is empowered to act 
decisively to avoid risk to the Enterprises. In conservatorship, with 
taxpayer support, this obligation is emphasized by express 
Congressional directions on conservator duties.
    Several parties brought legal challenges to the process by which 
FHFA issued the July 6, 2010 Statement and the February 28, 2011 
Directive, as well as to their substance. The United States District 
Courts for the Northern District of Florida, the Southern District of 
New York, and the Eastern District of New York all dismissed lawsuits 
presenting such challenges. The United States District Court for the 
Northern District of California (the ``California District Court''), 
however, has allowed such a lawsuit to proceed and has issued a 
preliminary injunction ordering FHFA ``to proceed with the notice and 
comment process'' in adopting guidance concerning mortgages that are or 
could be affected by PACE programs. Specifically, the California 
District Court ordered FHFA to ``cause to be published in the Federal 
Register an Advance Notice of Proposed Rulemaking relating to the 
statement issued by FHFA on July 6, 2010, and the letter directive 
issued by FHFA on February 28, 2011, that deal with property assessed 
clean energy (PACE) programs.'' The California District Court further 
ordered that ``[i]n the Advance Notice of Proposed Rulemaking, FHFA 
shall seek comments on, among other things, whether conditions and 
restrictions relating to the regulated entities' dealing in mortgages 
on properties participating in PACE are necessary; and, if so, what 
specific conditions and/or restrictions may be appropriate.'' The 
California District Court also ordered that ``[t]he comment period 
shall not be less than 60 days.'' The California District Court neither 
invalidated nor required FHFA to withdraw the July 6, 2010 Statement or 
the February 28, 2011 Directive, both of which remain in effect.
    In response to and compliance with the California District Court's 
order, FHFA is seeking comment on whether the restrictions and 
conditions set forth in the July 6, 2010 Statement and the February 28, 
2011 Directive should be maintained, changed, or eliminated, and 
whether other restrictions or conditions should be imposed. FHFA has 
appealed the California District Court's order to the U.S. Court of 
Appeals for the Ninth Circuit (the ``Ninth Circuit''). Inasmuch as the 
California District Court's order remains in effect pending the outcome 
of the appeal, FHFA is proceeding with the publication of this ANPR and 
NOI pursuant to that order. The Ninth Circuit has stayed, pending the 
outcome of FHFA's appeal, the portion of the California District 
Court's Order requiring publication of a final rule. FHFA reserves the 
right to withdraw this ANPR and NOI should FHFA prevail in its appeal, 
and may in that situation continue to address the financial risks FHFA 
believes PACE programs pose to safety and soundness through means other 
than notice-and-comment rulemaking.
    This ANPR and NOI reviews FHFA's statutory authority as the federal 
supervisory regulator of the Enterprises, reviews FHFA's statutory role 
and authority as the Conservator of each Enterprise, summarizes issues 
relating to PACE that are relevant to FHFA's supervision and direction 
of the Enterprises, suggests subjects relating to PACE on which FHFA 
might issue a proposed rule or otherwise provide guidance to the 
Enterprises within the governing statutory framework, and invites 
comments from the public.

III. Issues as to Which FHFA Seeks Comment

    In light of the California District Court's order and the 
background information provided above, FHFA seeks comments on the 
following issues regarding the Enterprises' dealing in mortgages on 
properties that participate in PACE programs or that could participate 
in PACE programs.

A. Conditions and Restrictions Relating to PACE

    The California District Court called upon FHFA to seek comments on 
whether conditions and restrictions relating to the regulated entities' 
dealing in mortgages on properties participating in PACE programs are 
necessary; and, if so, what specific conditions and/or restrictions may 
be appropriate. In the July 6, 2010 Statement and the February 28, 2011 
Directive, FHFA imposed certain conditions and restrictions relating to 
the Enterprises' dealing in mortgages on properties participating in 
PACE programs. FHFA thus will take comments on whether those 
restrictions and conditions should be maintained, changed, or 
eliminated, and whether other restrictions or conditions should be 
imposed. Accordingly, FHFA requests comment on the following question:
    Question 1: Are conditions and restrictions relating to FHFA-
regulated entities' dealings in mortgages on properties participating 
in PACE programs necessary? If so, what specific conditions and/or 
restrictions may be appropriate?

B. Financial Risk to the Enterprises Resulting From Subordination of 
Mortgage Security Interests to PACE Liens

    FHFA is concerned that PACE programs that involve subordination of 
any mortgage holder's security interest in the underlying property to 
that of the provider of PACE financing may increase the financial risk 
borne by the Enterprises as holders of mortgages on properties subject 
to PACE obligations, as well as mortgage-backed securities based on 
such mortgages. FHFA believes that any such increase in the financial 
risk on mortgages and mortgage-backed securities already in the 
Enterprise portfolios, especially if imposed without Enterprise 
consent, may present significant safety and soundness concerns. In 
light of that concern, FHFA requests comment on the following three 
questions regarding financial risks to the Enterprises relating to the 
subordination of mortgage security interests to PACE liens:
    Question 2: How does the lien-priming feature of first-lien PACE 
obligations affect the financial risks borne by holders of mortgages 
affected by PACE obligations or investors in mortgage-backed securities 
based on such mortgages? To the extent that the lien-priming feature of 
first-lien PACE obligations increases any financial risk borne by 
holders of mortgages affected by PACE obligations or investors in 
mortgage-backed securities based on such mortgages, how and at what 
cost could such parties insulate themselves from such increased risk?
    Question 3: How does the lien-priming feature of first-lien PACE 
obligations affect any financial risk that is borne by holders of 
mortgages affected by PACE obligations or investors in mortgage-backed 
securities based on such mortgages and that relates to any of the 
following:
     The total amount of debt secured by the subject property 
relative to the value of the subject property (i.e., Combined Loan to 
Value Ratio for the property or other measures of leverage);
     The amount of funds available to pay for energy-related 
home-improvement projects after the subtraction of administrative fees 
or any other program expenses charged or

[[Page 3962]]

deducted before funds become available to pay for an actual PACE-funded 
project (FHFA understands such fees and expenses can consume up to 10% 
or more of the funds a borrower could be obligated to repay under some 
PACE programs);
     The timing and nature of advancements in energy-efficiency 
technology;
     The timing and nature of changes in potential homebuyers' 
preferences regarding particular kinds of energy-efficiency projects;
     The timing, direction, and magnitude of changes in energy 
prices; and,
     The timing, direction, and magnitude of changes of 
property values, including the possibility of downward adjustments in 
value?
    Question 4: To the extent that the lien-priming feature of first-
lien PACE obligations increases any financial risk that is borne by 
holders of mortgages affected by PACE obligations or investors in 
mortgage-backed securities based on such mortgages and that relates to 
any of the following, how and at what cost could such parties insulate 
themselves from that increase in risk:
     The total amount of debt secured by the subject property 
relative to the value of the subject property (i.e., Combined Loan to 
Value Ratio for the property or other measures of leverage);
     The amount of funds available to pay for energy-related 
home-improvement projects after the subtraction of administrative fees 
or any other programs expenses charged deducted before funds become 
available to pay for an actual PACE funded project (FHFA understands 
such fees and expenses can consume up to 10% or more of the funds a 
borrower could be obligated to repay under some PACE programs);
     The timing and nature of advancements in energy-efficiency 
technology;
     The timing and nature of changes in potential homebuyer 
preferences regarding particular kinds of energy-efficiency projects;
     The timing, direction, and magnitude of changes in energy 
prices; and,
     The timing, direction, and magnitude of changes of 
property values, including the possibility of downward adjustments in 
value?

C. PACE and the Market for Home-Improvement Financing

    FHFA is concerned that the risks first-lien PACE programs present 
to mortgage holders may be unnecessary or unreasonable in light of 
other market options for financing home-improvement projects relating 
to energy efficiency that do not subordinate mortgage holders' security 
interests. In light of that concern, FHFA requests comment on the 
following four questions relating to PACE programs and the market for 
home-improvement financing:
    Question 5: What alternatives to first-lien PACE loans (e.g., self-
financing, bank financing, leasing, contractor financing, utility 
company ``on-bill'' financing, grants, and other government benefits) 
are available for financing home-improvement projects relating to 
energy efficiency? On what terms? Which do and which do not share the 
lien-priming feature of first-lien PACE obligations? What are the 
relative advantages and disadvantages of each, from the perspective of 
(i) The current and any future homeowner-borrower, (ii) the holder of 
an interest in any mortgage on the subject property, and (iii) the 
environment?
    Question 6: How does the effect on the value of the underlying 
property of an energy-related home-improvement project financed through 
a first-lien PACE program compare to the effect on the value of the 
underlying property that would flow from the same project if financed 
in any other manner?
    Question 7: How does the effect on the environment of an energy-
related home-improvement project financed through a first-lien PACE 
program compare to the effect on the environment that would flow from 
the same project if financed in any other manner?
    Question 8: Do first-lien PACE programs cause the completion of 
energy-related home improvement projects that would not otherwise have 
been completed, as opposed to changing the method of financing for 
projects that would have been completed anyway? What, if any, objective 
evidence exists on this point?

D. PACE and Protections for the Homeowner-Borrower

    FHFA is concerned that PACE programs may not incorporate features 
that adequately protect the interests of the homeowner-borrower, and 
that the lack of adequate protection could result in homeowner-
borrowers undertaking PACE projects or selecting PACE financing terms 
that increase the financial risks borne by mortgage holders such as the 
Enterprises. In light of that concern, FHFA requests comment on the 
following five questions relating to PACE and protections for the 
homeowner-borrower:
    Question 9: What consumer protections and disclosures do first-lien 
PACE programs mandate for participating homeowners? When and how were 
those protections put into place? How, if at all, do the consumer 
protections and disclosures that local first-lien PACE programs provide 
to participating homeowners differ from the consumer protections and 
disclosures that non-PACE providers of home-improvement financing 
provide to borrowers? What consumer protection enforcement mechanisms 
do first-lien PACE programs have?
    Question 10: What, if any, protections or disclosures do first-lien 
PACE programs provide to homeowner-borrowers concerning the possibility 
that a PACE-financed project will cause the value of their home, net of 
the PACE obligation, to decline? What is the effect on the financial 
risk borne by the holder of any mortgage interest in a subject property 
if PACE programs do not provide any such protections or disclosures?
    Question 11: What, if any, protections or disclosures do first-lien 
PACE programs provide to homeowner-borrowers concerning the possibility 
that the utility-cost savings resulting from a PACE-financed project 
will be less than the cost of servicing the PACE obligation? What is 
the effect on the financial risk borne by the holder of any mortgage 
interest in a subject property if first-lien PACE programs do not 
provide any such protections or disclosures?
    Question 12: What, if any, protections or disclosures do first-lien 
PACE programs provide to homeowner-borrowers concerning the possibility 
that over the service life of a PACE-financed project, the homeowner-
borrower may face additional costs (such as costs of insuring, 
maintaining, and repairing equipment) beyond the direct cost of the 
PACE obligation? What is the effect on the financial risk borne by the 
holder of any mortgage interest in a subject property if first-lien 
PACE programs do not provide any such protections or disclosures?
    Question 13: What, if any, protections or disclosures do first-lien 
PACE programs provide to homeowner-borrowers concerning the possibility 
that subsequent purchasers of the subject property will reduce the 
amount they would pay to purchase the property by some or all of the 
amount of any outstanding PACE obligation? What is the effect on the 
financial risk borne by the holder of any mortgage interest in a 
subject property if first-lien PACE programs do not provide any such 
protections or disclosures?

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E. PACE and Underwriting Standards

    FHFA is concerned that first-lien PACE programs may not incorporate 
underwriting standards that adequately ensure that the homeowner-
borrower will be able to repay the obligation, and that as a result 
homeowner-borrowers may undertake PACE projects, or select PACE 
financing terms, that adversely affect the homeowner-borrower's ability 
to repay other debt, including mortgage debt. In light of that concern, 
FHFA requests comment on the following three questions relating to PACE 
and underwriting standards:
    Question 14: How do the credit underwriting standards and processes 
of PACE programs compare to that of other providers of Home-improvement 
financing, such as banks? Do they consider, for example: (i) Borrower 
creditworthiness, including an assessment of total indebtedness in 
relation to borrower income, consistent with national standards; (ii) 
total loan-to-value ratio of all secured loans on the property 
combined, consistent with national standards; and (iii) appraisals of 
property value, consistent with national standards?
    Question 15: What factors do first-lien PACE programs consider in 
determining whether to provide PACE financing to a particular 
homeowner-borrower seeking funding for a particular project eligible 
for PACE financing? What analytic tools presently exist to make that 
determination? How, if at all, have the methodologies, metrics, and 
assumptions incorporated into such tools been tested and validated?
    Question 16: What factors and information do first-lien PACE 
programs gather and consider in determining whether a homeowner-
borrower will have sufficient income or cash flow to service the PACE 
obligation in addition to the homeowner-borrower's pre-existing 
financial obligation? What analytic tools presently exist to make that 
determination? How, if at all, have the methodologies, metrics, and 
assumptions incorporated into such tools been tested and validated?

F. Considerations Relating to FHFA's Intent To Prepare an EIS

    FHFA intends to prepare an EIS to address the potential 
environmental impacts of any proposed rule that FHFA may issue 
following its consideration of the comments submitted in response to 
this ANPR and NOI. To that end, this ANPR and NOI initiates the NEPA 
scoping process to identify the environmental issues and reasonable 
alternatives to be examined in the EIS, and requests comments regarding 
those and other matters related to the scope of the EIS (``EIS Scoping 
Comments'').
    To ensure that all relevant environmental issues and reasonable 
alternatives are addressed, FHFA invites and encourages EIS Scoping 
Comments. Interested parties are encouraged to submit their EIS Scoping 
Comments within a 60-day scoping period, which begins with publication 
of this notice. EIS Scoping Comments received after the end of the 
scoping period will be considered to the extent practicable. You may 
submit EIS Scoping Comments, identified by regulatory information 
number (RIN) 2590-AA53 and marked ``EIS Scoping Comments,'' by any of 
the methods identified in the ADDRESSES section above. Submissions may 
include both EIS Scoping Comments and other comments, but the EIS 
Scoping Comments must be separately identified.
1. Proposed Action
    FHFA's Proposed Action would direct the Enterprises not to purchase 
any mortgage that is subject to a first-lien PACE obligation or that 
could become subject to first-lien PACE obligations without the consent 
of the mortgage holder. FHFA believes that the Proposed Action is 
reasonable and necessary to limit, in the interest of safety and 
soundness, the financial risks that could be involuntarily borne by the 
Enterprises, thereby preserving and conserving the Enterprises' assets 
and property while protecting American taxpayers from further loss.
2. No Action Alternative
    As required by the Council on Environmental Quality regulations 
that implement NEPA, the EIS will analyze and present the potential 
environmental impacts associated with reasonable alternatives, 
including the No Action Alternative.
    The No Action Alternative is to withdraw the July 6, 2010 Statement 
and the February 28, 2011 Directive. This would allow the Enterprises 
to purchase mortgage loans secured by properties with outstanding 
first-lien PACE and PACE-like obligations.
3. Other Alternatives
    In addition to the Proposed Action and No Action alternatives 
described above, FHFA invites comments on reasonable alternatives that 
would reduce or avoid known or potential adverse environmental impacts 
associated with the proposed action while ensuring that the Enterprises 
operate in a safe and sound manner. Accordingly, FHFA requests that for 
each reasonable alternative suggested, the commenter explain the 
positive, neutral or negative environmental impacts, as well as 
potential changes in the level of financial risk borne by holders of 
any interest in a mortgage on PACE-affected properties, associated with 
the suggested alternative. Accordingly, FHFA specifically requests 
comment on the following question:
    Question 17: What specific alternatives to FHFA's existing 
statements about PACE should FHFA consider? For each alternative, as 
compared to the Proposed Action, what positive or negative 
environmental effects would result and how would the level of financial 
risk borne by holders of any interest in a mortgage on PACE-affected 
properties change?
4. Issues and Environmental Resources To Be Examined
    To facilitate the scoping process, FHFA has identified a 
preliminary approach and list of issues and environmental resources 
that it may consider in the EIS. This list is not intended to be all-
inclusive or to predetermine the scope of the EIS, but is intended to 
serve as a starting point for public comment.
     FHFA intends to develop scenarios (high, medium, and low) 
that describe three potential levels of uptake of PACE program loans by 
homeowners (irrespective of the Agency's action). These scenarios would 
be developed at the regional level and would make assumptions on the 
types of home improvement projects (e.g., home insulation, solar 
panels, geothermal energy units, etc.) that could be installed. The 
``high'' scenario would assume the potential for a high level of uptake 
of PACE projects by homeowners. The ``medium'' and ``low'' scenarios 
would assume medium and low levels of uptake. FHFA invites comment on 
how these scenarios should be developed.
     Potential effects of the Proposed Action and alternatives 
on the uptake of PACE home improvement projects will be considered. For 
each alternative analyzed in detail in the EIS, FHFA would estimate 
PACE project implementation for each of the scenarios listed above and 
then compare these estimates across the alternatives.
     Using assumptions on the types of home improvement 
projects that could be implemented, FHFA would estimate the potential 
energy and water consumption savings associated with each scenario at 
the regional level for each alternative.
     FHFA proposes to analyze the potential direct, indirect, 
and cumulative environmental impacts of

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the proposed action and alternatives for the following resource areas: 
Greenhouse gas emissions; climate change; air pollutant emissions 
(including Clean Air Act criteria pollutant emissions); human health; 
water conservation; cultural and historic resources; and 
disproportionately high and adverse impacts to low-income and minority 
populations (environmental justice).

IV. Request for Comments

    FHFA invites comments on all of the issues and questions discussed 
above, and will consider all comments in developing any proposed rule 
that FHFA may issue concerning the Enterprises' dealing in mortgages on 
properties participating in PACE programs. As to all questions 
enumerated above, commenters should provide supporting data and 
documentation for each of their responses, as these will assist FHFA in 
its consideration of comments.
    Studies addressing relevant aspects of PACE programs may be 
submitted for the agency's consideration. FHFA is interested in studies 
analyzing:
     The effect of PACE-funded improvements on the value of the 
underlying property, including differential effects over time and 
across markets;
     The comparative costs of PACE programs with other means of 
financing such as home equity loans, refinance transactions, and 
leasing programs;
     Payback periods for projects eligible for PACE funding, 
considering costs, energy savings, and risks (including risk of changes 
in energy pricing or in the level of subsidies or tax credits 
available);
     The economic life of PACE-funded improvements, 
particularly in relation to the term of the PACE loan;
     Default rates of PACE and non-PACE loans based on 
populations with comparable borrower, loan and property 
characteristics; and
     Other subjects relating to PACE and the financial risks 
PACE programs pose to mortgage holders such as the Enterprises.
    All study-related submissions should provide the complete study 
protocol; the date(s) the study was proposed, initiated, completed, and 
published or otherwise reported; all key assumptions; the sample size; 
the data; the results (including sensitivity of reported results to key 
assumptions); and any published report of the study. Study-related 
submissions should also identify the persons who developed, 
implemented, and published or otherwise reported the study, as well as 
the principal sources of funding for the study. All data should be 
provided in a reasonably accessible computer-readable format, such as 
Microsoft Excel files.

    Dated: January 19, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2012-1345 Filed 1-25-12; 8:45 am]
BILLING CODE 8070-01-P