Enterprise Underwriting Standards, 36085-36110 [2012-14724]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 77, Number 116 (Friday, June 15, 2012)]
[Proposed Rules]
[Pages 36085-36110]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14724]



[[Page 36085]]

Vol. 77

Friday,

No. 116

June 15, 2012

Part III





Federal Housing Finance Agency





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12 CFR Part 1254





Enterprise Underwriting Standards; Proposed Rule

Federal Register / Vol. 77 , No. 116 / Friday, June 15, 2012 / 
Proposed Rules

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1254

RIN 2590-AA53


Enterprise Underwriting Standards

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking; request for comments.

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SUMMARY: The Federal Housing Finance Agency (``FHFA'') hereby issues 
this Notice of Proposed Rulemaking (NPR) concerning underwriting 
standards for the Federal National Mortgage Association (Fannie Mae), 
and the Federal Home Loan Mortgage Corporation (Freddie Mac), 
(together, the Enterprises) relating to mortgage assets affected by 
Property Assessed Clean Energy (``PACE'') programs.
    The NPR 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, summarizes comments received on subjects relating 
to PACE on which FHFA has considered alternative proposed rules, sets 
forth FHFA's responses to issues raised in the comments, presents the 
proposed rule and alternatives FHFA is considering, and invites 
comments from the public.

DATES: Written comments must be received on or before July 30, 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.
     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:

Executive Summary

    The Federal Housing Finance Agency (``FHFA'') hereby issues this 
Notice of Proposed Rulemaking (NPR) concerning underwriting standards 
for the Federal National Mortgage Association (Fannie Mae), and the 
Federal Home Loan Mortgage Corporation (Freddie Mac), (together, the 
Enterprises) relating to mortgage assets affected by Property Assessed 
Clean Energy (``PACE'') programs.
    FHFA is an independent federal agency created by the Housing and 
Economic Recovery Act of 2008 (HERA) to supervise and regulate the 
Enterprises and the twelve Federal Home Loan Banks (the ``Banks''). 
FHFA is the exclusive supervisory regulator of the Enterprises and the 
Banks. Both Enterprises presently are in conservatorship under the 
direction of FHFA as Conservator.
    PACE programs involve local governments providing property-secured 
financing to property owners for the purchase of energy-related home-
improvement projects. PACE programs have been encouraged by investment 
firms that intend to provide financing for local governments to support 
their lending programs. Homeowners repay the amount borrowed, with 
interest, over a period of years through ``contractual assessments'' 
secured by the property and added to the property tax bill. Repayment 
goes either to a county or other funding source or to pay principal and 
interest on bonds. Under most state statutory PACE programs enacted to 
date, the homeowner's obligation to repay the PACE loan becomes in 
substance a first lien on the property, thereby subordinating or 
``priming'' the mortgage holder's security interest in the property. On 
July 6, 2010, FHFA issued a Statement concerning such first-lien PACE 
programs (the Statement), which directed the Enterprises and the Banks 
to take certain prudential actions to limit their exposure to financial 
risks associated with first-lien PACE programs. In a directive issued 
February 28, 2011 (the Directive), FHFA reiterated the direction 
provided to the Enterprises in the Statement and expressly directed the 
Enterprises not to purchase mortgages affected by first-lien PACE 
obligations.
    Several parties brought legal challenges to the process by which 
FHFA issued the Statement and the 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, 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 first-lien 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 
``After considering any public comments received related to the Advance 
Notice of Proposed Rulemaking, * * * FHFA shall cause to be published 
in the Federal Register a Notice of Proposed Rulemaking setting forth 
FHFA's proposed rule relating to PACE programs.'' The California 
District Court neither invalidated nor required FHFA to withdraw the 
Statement or the Directive, both of which remain in effect.
    In response to and in compliance with the California District 
Court's order, FHFA sought comment through an Advanced Notice of 
Proposed

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Rulemaking, published in the Federal Register at 77 FR 3958 (January 
26, 2012), 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 NPR pursuant to and in compliance with 
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 will withdraw this NPR should FHFA 
prevail on its appeal and will, in that situation, continue to address 
the financial risks FHFA believes PACE programs pose to safety and 
soundness as it deems appropriate.
    The NPR 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, summarizes comments received on subjects relating 
to PACE on which FHFA has considered alternative proposed rules, sets 
forth FHFA's responses to issues raised in the comments, presents the 
proposed rule and alternatives FHFA is considering, and invites 
comments from the public.

I. Comments

    Pursuant to the Preliminary Injunction, FHFA invites comments on 
all aspects of this NPR. 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 HERA to supervise 
and regulate the Enterprises and the Banks. 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 the authority necessary to oversee Fannie Mae, 
Freddie Mac, and the Banks. 12 U.S.C. 4511(b)(2).
    The Enterprises 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).
    HERA also provided for assistance by the U.S. Department of the 
Treasury in the event that financial aid was needed by an Enterprise. 
On September 7, 2008, the Treasury Department executed Senior Preferred 
Stock Agreements (SPSAs) to provide such assistance following the 
imposition of conservatorships by FHFA. A purpose of the agreements was 
to maintain the Enterprises at a level above the statutory level of 
``critically undercapitalized,'' which would trigger receivership and 
remove the Enterprises from providing market services as was the 
purpose of the conservatorships. In effect, the Enterprises maintain 
nominal positive net worth through the infusion of taxpayer funds by 
the Treasury Department; losses the Enterprises incur increase the 
draws they make under the SPSAs and the concomitant burden on 
taxpayers.

C. Issues Relating to PACE Programs 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 generally 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 technologies. 
Homeowners agree to repay the amount borrowed, with interest, over a 
period of years through ``contractual assessments'' paid to the 
municipality and often added to their property tax bill. Over the last 
three years, more than 25 states have enacted legislation authorizing 
local

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governments to set up PACE-type programs. Such legislation generally 
leaves most program implementation and standards to local governmental 
bodies and, but for a few instances, provides no uniform requirements, 
standards, 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 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 PACE loan, 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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    Funding for PACE programs may come from local funds, grants, bond 
financing, or such other device as is available to a county or 
municipality. PACE programs generally anticipate that private-sector 
capital would flow through the local government to the homeowner-
borrower (or the homeowner-borrower's contractors). While PACE programs 
may vary in the particular mechanisms they use to raise capital, in 
many instances private investors would provide capital by purchasing 
bonds secured by the payments that homeowner-borrowers make on their 
PACE obligations. From the capital provider's perspective, a critical 
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 utilizes the 
property-tax assessment system as the vehicle for repayment. Because of 
the ``lien-priming'' feature of most PACE programs authorized to date, 
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 and ultimate collectability of first and second mortgages, 
and of any other property-secured financial obligation.
    Proponents of first-lien PACE programs have analogized the 
obligations to repay PACE loans to traditional tax assessments. 
However, unlike traditional tax assessments, PACE loans are voluntary 
and have other features not typical of tax assessments--homeowners opt 
in, submit applications, and contract with the city or county's PACE 
program to obtain the loan and repay it. 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 
bears the cost of repairing the fixtures should they become inoperable, 
including during the time the PACE loan remains outstanding. PACE 
program loans are repaid and end on a set term determined for the 
specific PACE assessment. In contrast, the duration for or the number 
of installments for many other assessments for municipal improvements 
for a locality or a special assessment district are not specific to the 
affected parcel or property but are instead aggregated across all 
affected properties based on the structure of the bond or other 
financing vehicle. Further, each locality sets its own terms and 
requirements for homeowner and project eligibility for PACE loans; no 
national standards exist, nor, in many instances, are all standards 
uniform even for programs within the same state. Nothing in existing 
PACE programs 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 fail to employ standard personal creditworthiness requirements, 
such as limits on credit scores 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\ State laws may or may not be specific on whether such 
loans must be recorded.
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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 (pp. 4-7 of document at ``Lender Info and 
Acknowledgement'' link) (last visited Jan. 12, 2012).
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    The first state statutes authorizing PACE programs were enacted in 
2008. As PACE programs were being considered by more states, FHFA began 
to evaluate the potential impact of these programs on the asset 
portfolios of FHFA-regulated entities. On June 18, 2009, FHFA issued a 
letter and background paper raising concerns about first-lien PACE 
programs. To better understand the risks presented by PACE programs 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 and concerns 
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 athttps://
www.efanniemae.com/sf/formsdocs/documents/secinstruments/doc/3005w.doc.

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    Shortly after the Advisories were issued, FHFA received a number of 
inquiries seeking FHFA's position.\7\ On July 6, 2010, FHFA issued the 
Statement, which provided:
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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). These letters are available for inspection upon request at 
FHFA.

    [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 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, following additional inquiries from the 
public, PACE supporters, and PACE opponents, the Conservator issued a 
Directive stating the Agency's view that PACE liens ``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.

III. Summary of Responses to the Advance Notice of Proposed Rulemaking

A. Volume and General Nature of Comments

    In response to the Advance Notice of Proposed Rulemaking of January 
2012 (the ``ANPR'') issued pursuant to the Preliminary Injunction, FHFA 
received a large number of comments. Some 33,000 comments were short, 
one- or two- page, organized-response submissions, usually termed 
``form letters.'' Some additional 400 comments came in the form of 
substantive response letters that fell into several categories that are 
described herein. Samples of the form letters and several hundred other 
comments were posted to FHFA's Web site.\9\ FHFA notes that the 
majority of comments did not respond directly to the questions 
presented in the ANPR, a number responded directly to only a few 
questions, and only a few responded to all the questions.
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    \9\ The comments can be viewed at https://www.fhfa.gov/Default.aspx?Page=89 (1/26/2012 ``Mortgage Assets Affected by 
(Property Assessed Clean Energy) PACE Programs'' link).
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1. Organized-Response Form Letters
    The 33,000 organized-response form letters fell into five 
categories of comments, samples of which were posted to the FHFA Web 
site. Generally, these comments included support for PACE programs, 
noting their contribution to energy efficiency, environmental benefits, 
job creation, and other economic or climate benefits. The comments 
called for FHFA to withdraw its July 2010 directive. Others included 
assertions that PACE programs represent assessments, like those made by 
local governments for years, that they are not loans, and that these 
assessments pose ``minimal'' risks to lenders, investors, and 
homeowners. Some cited guidelines from the Council on Environmental 
Quality (CEQ),\10\ the U.S. Department of Energy (DOE),\11\ and 
legislation proposed in Congress regarding PACE programs (most 
frequently to legislation pending in the U.S. House of Representatives 
as H.R. 2599, the ``PACE Assessment Protection Act of 2011''). These 
comments contained little supporting information or results of any 
testing or data, and were generally limited to information from certain 
homeowners of their experiences with PACE programs or expressions of 
general support for such programs. The comments in the ``prepared 
input'' responses almost uniformly called on FHFA to change its 
position to permit the Enterprises to purchase such loans encumbered by 
PACE loans that created liens with priority over first mortgages.
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    \10\ Council on Environmental Quality, Middle Class Task Force, 
Recovery Through Retrofit (October 2009), available at https://www.whitehouse.gov/assets/documents/Recovery_Through_Retrofit_Final_Report.pdf.
    \11\ Department of Energy, Guidelines for Pilot PACE Financing 
Programs (May 7, 2010) (hereinafter, ``DOE Guidelines''), available 
at https://www1.eere.energy.gov/wip/pdfs/arra_guidelines_for_pilot_pace_programs.pdf.
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2. Substantive Responses
    The roughly 400 substantive responses (i.e., submissions other than 
form letters) took various approaches. Most but not all expressed 
support for PACE programs. Some expressed only limited or qualified 
support for PACE programs, and a few expressed opposition to or 
reservations about first-lien PACE programs.

B. Specific Issues Raised in Comments

1. Financial Risks First-Lien PACE Programs Pose to Mortgage Holders 
and Other Interested Parties
    Many commenters addressed the extent of incremental financial risk 
first-lien PACE programs pose to mortgage holders and other interested 
parties; some such submissions included direct responses to Questions 2 
and 3 of the ANPR. PACE proponents generally asserted that first-lien 
PACE programs pose little, if any, incremental financial risk to 
mortgage holders. Examples of such submissions include the following:
     Letters submitted by Rep. Nan Hayworth and several other 
members of Congress, and by Sen. Michael Bennet and several other U.S. 
Senators each asserted that ``PACE assessments present minimal risks to 
lenders.''
     The Town of Babylon, NY reiterated that it had previously 
communicated to FHFA its view that: ``If you revisit and reevaluate the 
potential of ELTAPs {PACE obligations{time} , we believe you'll find 
they will enhance the value of participating homes and, in fact, 
reinforce, rather than `impair', the first mortgages. In reality, these 
programs will help homeowners stay in their houses by reducing their 
utility bills while providing a hedge against rising energy costs in 
the future. Consider that if 5% of houses whose mortgages are 
guaranteed by Fannie Mae and Freddie Mac were retrofitted through Green 
Homes programs, the dollar amount would add up, approximately, to an 
infinitesimal 0.3% of the total guaranteed by Fannie and Freddie.''
     Sonoma County, CA asserted that ``There is no demonstrable 
risk to the Enterprises from the existing PACE programs; instead, it 
appears that the Enterprises are enjoying increased security on loans 
they own because of the added value of the improvements (over $45 
million in Sonoma County); with de minimus exposure to risk on any 
individual project.'' The County also asserted that ``Participants in 
the PACE program have low tax

[[Page 36090]]

delinquency rates and low mortgage default rates. The PACE improvements 
add extra value, and thus extra security, to the mortgage.'' The County 
further asserted that it ``does not believe PACE assessments impose any 
additional risk on mortgage holders or investors in mortgage-backed 
securities. In fact, the total value of improvements, compared to the 
risk of possible default or delinquency, almost certainly leaves such 
investors better protected over all.''
     The Natural Resources Defense Council asserted that ``Even 
if we assume, against the weight of existing evidence, that the 
existence of a PACE lien on a property does create an incremental risk 
to mortgage holders, it can be shown that this risk is de minimis. If a 
property owner whose home is valued at $300,000 with a $250,000 
mortgage is seeking $20,000 in PACE financing, at an interest rate of 
7% and a 20-year assessment period, the annual PACE assessment would be 
$1,960. In the event of foreclosure, under the law of California and 
most states, and under the DOE Guidelines, only the amount of the PACE 
payment in arrears would be due and take priority over the first 
mortgage. Thus, if the owner had failed to pay their property taxes for 
a year, only $1,960 would be owed, and the new owner would be 
responsible for the remaining stream of assessments. Assuming an 
extremely high foreclosure rate of 10% across the Enterprises' 
portfolio of mortgages on properties with PACE financings and one year 
of delinquency on the assessment, the risk of loss to existing lenders 
from PACE liens would average $196 per home across the portfolio of 
PACE-financed properties. Assuming a more reasonable foreclosure rate 
of 5%, the risk to existing lenders from PACE liens across the PACE-
financed portfolio would average less than $100 per home.''
     The Great Lakes Environmental Law Center asserted that 
``The lien-priming feature of first-lien PACE obligations lowers the 
financial risks borne by holders of mortgages affected by PACE 
obligations or investors in mortgage-backed securities based on such 
mortgages. * * * PACE reduces Fannie Mae and Freddie Mac's exposure to 
risk and loss by encouraging private, market driven solutions for our 
nation's mortgage industry.''
     The Office of the Mayor of the City of New York noted that 
funding alternatives to PACE programs, such as utility bill financing, 
do not work because of high customer turnover and that PACE programs 
avoid this problem as the obligation runs with the land. The comment 
urged FHFA to adopt reasonable underwriting standards. The comment 
stated that, contrary to FHFA's statement that PACE liens lack 
``traditional community benefits associated with taxing initiatives,'' 
PACE liens do provide community benefits such as improved air quality 
and aiding in the fight against climate change. Further, the letter 
noted that PACE default rates are ``vanishingly small.''
     The City of Palm Desert, CA asserted that ``The lien-
priming feature of first-lien PACE obligations does not adversely 
affect the financial risks borne by holders of mortgages affected by 
PACE obligations or investors in mortgage-backed securities if 
appropriate underwriting standards and program designs are implemented. 
Indeed, given proper PACE program design, the financial risks borne by 
such mortgage holders may actually be decreased.''
     Placer County, CA asserted that ``[T]he installation of 
PACE improvements is anticipated to reduce property owners' utility 
costs (offsetting the contractual assessment installments), increases 
their property's value, and allows them to hedge themselves against 
rising fuel prices.'' The County also stated that ``the FHFA [should] 
adopt a rule to the effect that if a PACE program complies with the 
White House's policy framework and the Department of Energy's best 
practice guidelines, then the Enterprises * * * may purchase or insure 
a mortgage loan secured by a property that is encumbered by a PACE 
lien. * * *''. The letter noted that PACE programs present no greater 
risks than other assessments: ``The County has levied taxes and 
assessments to achieve important public purposes, such as the 
construction of schools, the installation of water and sanitary sewer 
systems and the undergrounding of public utilities, for more than 100 
years. * * * PACE is a safe and sound financing mechanism for energy 
retrofitting the country's existing building stock.''
     Leon County, FL asserted that ``PACE programs increase 
property values, [and] they essentially provide an `extra layer' of 
scrutiny on the borrower and the improvements proposed, because most 
programs, including LEAP, require positive cash flow. In short, PACE 
programs like LEAP will not authorize financing, and thus establish 
priority liens, on risky properties or property owners.'' The County 
further stated that its PACE program ``has minimized the financial risk 
to the holder of any mortgage interest because the specific types of 
information in the audit are prescribed to assure the estimated utility 
savings are known and the return on investment is fully disclosed to 
the applicant.''
     The Environmental Defense Fund asserted that ``PACE will 
simultaneously mitigate other, more significant risks'' such as energy 
price increases, ``to yield a net decline in the chance of mortgage 
default.''
    Many such submissions provided little if any analysis to support 
such assertions, while others proffered discussion of some or all of 
the subjects noted below in paragraphs (a) through (e).
    Other commenters asserted that first-lien PACE programs would pose 
material incremental financial risk to mortgage holders. For example,
     Freddie Mac asserted that ``The priority lien feature of 
many PACE programs has the impact of transferring the risk of loss, 
without compensation or underwriting controls, from the PACE lender to 
the mortgage lenders and investors who have neither priced for, nor 
accepted the risk * * *. In virtually all cases, our recovery in the 
event of a default would be lower than if the PACE loan did not have a 
priority lien. Potential losses to Freddie Mac could be substantial and 
would include payment of the outstanding loan amount, expenses 
associated with the possible extension of the foreclosure process, and 
the impact of the encumbrance on the resale value of the property.''
     Fannie Mae asserted that ``There are significant risks 
associated with PACE Programs because of the potential to increase the 
frequency and severity of credit losses to Fannie Mae (or any other 
mortgage loan investor), as well as other possible adverse consequences 
for borrowers. The most significant risks derive from the lien priority 
of PACE loans, potential increases in loss severity as a result of PACE 
loans, and increases in credit risk because of the limited assessment 
of a borrower's ability to repay a PACE loan.''
     The Federal Home Loan Bank of NY asserted that ``The 
automatic priority lien status typically granted to PACE lending 
undermines not only the FHLBNY member-lenders' lien priority but also 
therefore, the FHLBNY's pre-established lien priority which presents a 
key disruption to well-established first mortgage home lending.''
     The Joint Trade Association (American Bankers Association 
et al.) asserted that ``The lien-priming feature of first-lien PACE 
obligations greatly increases the credit exposure of mortgage-backed 
securities, to mortgage investors, taxpayers, and mortgage markets 
themselves. Mortgage investors rely on their lien position. Losing it

[[Page 36091]]

unknowingly, in exchange for nothing, substantially harms the value of 
mortgage investments. The GSEs so dominate the mortgage market today 
that losses from super-lien loans would be heavily concentrated in two 
GSEs.''
     The National Association of Realtors asserted that ``The 
presence or potential presence of a PACE loan, taking the first lien 
position ahead of the mortgage, invariably leads to the devaluation of 
the mortgage as a secured asset.''
     The National Association of Home Builders (NAHB) noted 
that first lien PACE programs would alter ``the valuations for 
mortgage-backed securities by increasing the severity of loss to the 
mortgage lender in the event a mortgage goes to foreclosure and the 
lender is obligated to pay past-due amounts outstanding on the PACE 
lien.''
     The National Multi Housing Counsel and National Apartment 
Association comment stated, ``First lien matters are fundamental and 
must be addressed if Property Assessed Clean Energy (PACE) programs are 
to move forward. As our industry relies on non-recourse loans subject 
to property cash-flow, protecting the lien holder interest is critical 
to maintaining cost-effective liquidity in the market. Any cloud on the 
lien through debt or local tax provisions that jeopardize the first 
lien could have material implications on a broad basis.''
     SchoolsFirst Federal Credit Union stated that ``The 
concern which we have with PACE relates to the lien-priming feature 
which typically attaches to these programs. In the event of 
foreclosure, this lien-priming could have a significant adverse impact 
on the holder of the first mortgage on the secured property. This is 
particularly true in the current market.'' The Credit Union further 
stated that ``short of obtaining a blanket insurance policy to insure 
against this risk (and assuming that one is available) we can think of 
no other protections short of retiring the lien * * *.''
     The Federal Home Loan Bank of Indianapolis noted that 
alteration of lien priority ``after the fact could have an adverse 
impact on the valuation of the Bank's collateral in jurisdictions with 
PACE programs, forcing the Bank to apply loan market value adjustments 
* * *.''
a. Effects of PACE-Funded Projects on the Value of the Underlying 
Property
    Many commenters asserted that PACE-funded projects would add value 
to the underlying property, and suggested that such incremental value 
would protect mortgage holders. Such comments generally did not, 
however, assert that the purported increase in property value would 
exceed the amount of the PACE obligation. For example,
     Renewable Funding asserted that ``Numerous studies show 
that energy efficiency and renewable energy improvements increase a 
home's value.'' Renewable Funding's submission asserts that ``An April 
2011 study of 72,000 homes conducted by the Lawrence Berkeley National 
Laboratory * * * showed an average $17,000 sales price premium for 
homes with solar P[hoto]V[oltaic] systems,'' and ``Another 2011 study 
published in the Journal of Sustainable Real Estate of homes with 
Energy Star ratings showed purchase prices to be nearly $9.00 higher 
per square foot for energy efficient homes.''
     Placer County, CA asserted that ``Efficiency and comfort 
generated from PACE improvements increase property value. A study by 
Earth Advantage Institute concluded that new homes certified for energy 
efficiency sold for 8% more than non-certified new homes, and existing 
homes with energy certification sold for 30% more during the period May 
2010-April 2011. (See Commenter's Exhibit 1, Banks may overlook value 
of energy efficiency, Harney, August 26, 2011, Tampa Bay Times.).'' The 
County also asserted that ``There is wide recognition that the cost 
savings and comfort from PACE-type improvements adds value to property. 
A recent survey (See Commenter's Exhibit 1) of reliable sources 
identifies increased value related to PACE-type improvements. This 
survey did not find any instance of decreased value caused by PACE-type 
improvements.''
     Sonoma County, CA stated that it ``is not aware of any 
evidence that energy efficiency and renewable energy improvements cause 
a decline in property value'' and asserted that several ``studies 
support the conclusion that these improvements add value to property.''
     The Board of County Commissions for Leon County, Florida 
asserted that ``The overwhelming weight of the data reflects that 
energy efficiency and renewable energy improvements reduce homeowners' 
energy costs and increase property values. The State of Florida long 
has recognized the increase in property values caused by the 
installation of renewable energy projects.''
     Chris Fowle, a member of Environmental Entrepreneurs 
asserted that ``PACE can further reduce risk to existing lenders by 
improving the value of their properties. Numerous studies show that 
energy efficiency and renewable energy improvements increase a home's 
value. For example, an April 2011 study of 72,000 homes by the Lawrence 
Berkeley National Laboratory showed that homes with solar PV systems 
had an average $17,000 sales price premium.''
     California State Senator Fran Pavley and California 
Assembly member Jared Huffman asserted that, with energy efficiency 
retrofits, ``[p]roperty values go up, strengthening owners' financial 
position and increasing the value of a lender's collateral.''
     The City of Palm Desert, CA asserted that ``Studies have 
shown that energy efficiency and renewable energy measures increase a 
home's value. For instance, a 2011 statistical study published in the 
Journal of Sustainable Real Estate of homes with ENERGY STAR ratings 
showed purchase prices to be $8.66 higher per square foot than non-
ENERGY STAR homes in the study area. An April 2011 statistical study of 
72,000 California homes by the Lawrence Berkeley National Laboratory 
concludes that there is strong evidence that homes with photovoltaic 
(PV) systems in California have sold for a premium over comparable 
homes without PV systems, corresponding to a premium of approximately 
$17,000 for a 3,100 watt PV system. * * *''
     The Sierra Club asserted that ``Clean energy improvements 
often provide substantial increase in resale value to homes, thus 
lessening risk to homeowners.''
    Other commenters questioned the net effect of PACE projects and 
liens on the value of the collateral available to protect mortgage 
holders. For example:
     Freddie Mac asserted that ``we are not aware of reliable 
evidence supporting a conclusion that energy efficiency improvements 
increase property values in an amount equal to the cost of the 
improvement. Rather, our experience with other home improvements 
suggests that any increase in property values is likely to be 
substantially less than such cost, meaning that homeowners who take on 
PACE loans are likely to increase the ratio of their indebtedness 
relative to the value of their properties.''
     The Joint Trade Association asserted that ``PACE loans 
decrease the value of the property by encumbering it with a lien. Non-
equity forms of financing do not do so. * * * The cost of home 
improvements, energy-related or otherwise, are very often not reflected 
in the property's market value.'' The Association stated that in some 
states the ten percent fee permitted to localities for administering a 
PACE loan is subtracted from the financed amount,

[[Page 36092]]

potentially making the ``entire retrofit purchase a net financial loss 
to homeowners.'' The letter challenged an assertion by PACE supporters 
that home values increase ``$20 for each $1 in annual energy savings.'' 
The source of the statement was attributed to a 1998 study, conducted 
at a time when home costs were much greater; the comment considered the 
study, given current market conditions, to be obsolete.
    Additional commenters asserted that market conditions and data 
limitations have made it difficult or impossible to determine the net 
effect of PACE-financed projects on the underlying property. For 
example:
     The U.S. Department of Energy noted that FHFA had 
expressed concern about ``The potential impact of PACE on residential 
property values.'' DOE then asserted that ``there is insufficient data 
and analysis available to provide conclusive answers.''
     Representatives of Malachite, LLC and Thompson Hine LLP 
asserted that ``Single-family home values remain in too great a state 
of flux to perform `apples-to-apples' valuations of retrofitted versus 
non-retrofitted buildings,'' and ``additional research is necessary to 
more accurately determine the effect of energy-efficiency and green 
features on home values across a variety of markets and residential 
price points.''
     The National Association of Realtors asserted that ``Many 
markets are still determining what, if any, value green features add to 
real property,'' and that ``it is unclear at best whether the resulting 
improvements add enough value to compensate for the additional risks.''
b. Cash-Flow Effects of PACE-Funded Projects
    Many commenters asserted that PACE programs are cost-effective and, 
if they are administered with the proper standards, a homeowner's PACE 
obligations would be offset by cost savings leading to increased free 
cash flow over the life of the project, thereby purportedly enhancing 
the borrower's ability to repay financial obligations and reducing the 
financial risk to mortgage holders. Such comments included responses to 
Questions 1, 2, 3, and 4 set forth in the ANPR. Examples of these 
comments include the following:
     Sonoma County, CA asserted that it ``strongly encourages 
applicants to engage a trained auditor to evaluate the most economic, 
cost-effective measures that can be taken to achieve the property 
owner's desired energy savings. Properly sized projects result in no 
additional annual cost to the property owner, and overall should 
achieve cost savings.''
     Placer County, CA asserted that: ``The installation of 
PACE improvements is anticipated to reduce property owners' utility 
costs (offsetting the contractual assessment installments), increases 
their property's value, and allows them to hedge themselves against 
rising fuel prices.''
     Boulder County, CO asserted that ``Savings: Because energy 
efficiency and renewable energy improvements reduce homeowners' energy 
bills, they are inherently safe investments for homeowners and lenders. 
* * * Cost Effective: Projects must pay for themselves by having a 
savings-to-investment ratio greater than one (SIR >1).''
     Renovate America stated ``homeowners already spend the 
equivalent of 25% of their mortgage payments on utility bills. With the 
PACE lien, at least to start, the payments should generally be offset 
by utility bill savings, so there is little or no increase in their 
overall expenses. Over time, the savings should increase as the utility 
rates increase, and the PACE lien has the potential to increase the 
homeowner's income or cash flow, not the reverse.''
    Most such comments were not accompanied by supporting data, but 
instead relied upon the assumption that PACE-funded projects that are 
anticipated to provide cash-flow benefits will actually deliver those 
benefits.
    Some comments recognized that the actual cash-flow effects of PACE-
funded projects depend upon future contingencies.
     Leon County, FL stated that ``As energy prices are 
expected to rise for the foreseeable future, the difference between the 
cost of improvements and energy savings should widen positively. At the 
extremes, while a dramatic reduction in energy prices might negatively 
affect the cost/benefit analysis for energy efficient product 
purchases, a dramatic reduction in energy prices likely would make it 
easier for homeowners to afford mortgage payments through increased 
cash on hand and an improving economy. On the other hand, a dramatic 
increase in energy prices, which is more plausible than a dramatic 
reduction, would place a premium on energy efficient products and 
homes.''
     The City of Palm Desert, CA asserted that ``This strong 
upward trend'' in energy prices ``indicates that the risk of changes in 
energy prices adversely affecting the projected savings-to-investment 
ratio is relatively low. If anything, this data indicates that the 
energy prices are likely to change in a way that positively affects the 
projected savings-to-investment ration, therefore positively affecting 
the borrower's cash revenues and the safety and soundness of a mortgage 
loan.''
    Other commenters questioned whether PACE can generate savings 
sufficient to make the retrofit cost-effective. Examples of these 
comments include the following:
     The Joint Trade Association asserted that ``Any 
disclosures about future utility costs are conjecture and are 
unreliable. It would be more appropriate and more accurate to disclose 
that any future savings are unknown. If a PACE loan does not produce 
the savings hoped for, the result is an increased risk of default on 
the PACE loan, the mortgage, or both because of the increased CLTV, a 
strong predictor of mortgage default.''
     The Joint Trade Association also asserted that ``PACE loan 
programs do not require that the loan proceeds be used in a cost-
effective manner. * * * The amount of energy savings from one piece of 
equipment varies from building to building. The cost of electricity 
varies by location and sometimes by time of day. The cost of fuel can 
vary seasonally. The amount of electricity that air conditioners use 
varies by indoor and outdoor temperatures, and it varies during 
rainfall. A solar panel in sunny regions will produce different savings 
than one in cloudy areas, or in a location near tall buildings or 
trees. Its sun exposure varies by the angle at which it is installed. 
Whether an individual retrofit would be cost-effective would require an 
engineering analysis, but PACE programs do not require engineering 
analyses.''
     The National Association of Realtors asserted that ``The 
energy efficiency and renewable energy investments are designed to `pay 
for themselves,' which is to say that the homeowner's utility bill goes 
down by more than their property tax bill goes up. However, it is 
difficult to measure the benefits of these improvements because the way 
an owner uses energy in a home may change over time, depending on 
variables such as weather and family composition and whether or not the 
energy efficiency retrofit has become technologically outdated, or was 
ever as efficient as it was supposed to be.''
c. Effect of Non-Acceleration of PACE Obligations Upon Default or 
Foreclosure
    Many commenters asserted that the fact that PACE obligations do not 
accelerate upon default or in foreclosure

[[Page 36093]]

mitigates or eliminates any financial risk first-lien PACE programs 
would otherwise pose to mortgage holders. The economic reasoning 
advanced in such comments was generally that because the obligation is 
assumed by the successor owner, even in a foreclosure the mortgage 
holder will only be liable for the past-due payments, not the entire 
obligation. Such comments included responses to Questions 1 and 4 set 
forth in the ANPR. Examples of these comments include the following:
     Boulder County asserted that ``Non-Acceleration'' was a 
positive feature of PACE because ``Future, unpaid PACE assessments 
remain with a property upon sale or other transfer to a new owner, 
protecting lenders from total extinguishment of unsecured debt or home 
equity lines in defaults when a home is worth less than its outstanding 
mortgage balance.''
     Connecticut Fund for the Environment asserted that ``the 
non-acceleration design of PACE assessments means that in the unlikely 
case of a default only the amount past due would have seniority on the 
mortgage. The outstanding balance would remain with the property to be 
paid in due course.''
     City of Palm Desert, CA asserted that ``In California, 
payment of PACE assessments may not be accelerated by the local 
government if there is a delinquency in the payment of the assessment, 
similar [to] treatment of other property taxes in California. We 
believe non-acceleration of PACE assessments is [an] important 
condition for the protection of homeowners, mortgage lenders, and 
government-sponsored enterprises. Non-acceleration is an important 
mortgage holder protection because liability for the assessment in 
foreclosure is limited to any amount in arrears at the time; the total 
outstanding assessed amount is not due in full, therefore greatly 
mitigating the effect of the `lien-priming' feature of the PACE 
assessment upon mortgage lenders and subsequent investors in mortgage 
interest.''
     Placer County, CA asserted that ``The County's PACE 
program also incorporates other safeguards. For example, California law 
does not permit acceleration of the unpaid principal amount of a 
contractual assessment; in the event of delinquencies in the payment of 
contractual assessment installments, the County is authorized to 
initiate judicial foreclosure of delinquent installments only (plus 
penalties and interest). This safeguard makes it more affordable for 
private lienholders to protect their liens in the event the County 
forecloses delinquent contractual assessment installments.''
     Sonoma County, CA asserted that ``most state laws, 
including California law, do not allow a local government to accelerate 
the amount due on an assessment in the event of a delinquency. Only the 
unpaid, overdue amount would be due. Lenders can protect their interest 
by paying this amount * * *.''
     The Natural Resources Defense Council explains that its 
calculations purporting to establish ``de minimis'' risk are based on 
the premise that ``[i]n the event of foreclosure, under the law of 
California and most states, and under the DOE Guidelines, only the 
amount of the PACE payment in arrears would be due and take priority 
over the first mortgage. Thus, if the owner had failed to pay their 
property taxes for a year, only $1,960 would be owed, and the new owner 
would be responsible for the remaining stream of assessments.''
     Florida PACE Funding Agency asserted that it ``does not 
believe that the PACE assessments in Florida will increase any 
financial risk to the holder of the mortgage or investors in mortgage 
backed securities. * * * Since the PACE assessments are not subject to 
acceleration (unlike many loans) the mortgage holder or investors in 
mortgage backed securities would look at each year's assessment amount, 
not the total principal of the assessment.''
     Jonathan Kevles asserted that ``The requirement for non-
acceleration of the PACE bond payment in the event of foreclosure makes 
the downside of foreclosure to mortgage holders negligible.''
    Other commenters asserted that the fact that PACE obligations do 
not accelerate upon default or in foreclosure does not insulate the 
mortgage holder from risk. Such comments included responses to Question 
6 set forth in the ANPR. Examples of these comments include the 
following:
     The Appraisal Institute asserted that ``From a valuation 
perspective, it is important to understand whether a seller paid 
assessment influenced the sales price. The appraiser would have to look 
at the sales price and decide if the buyer assuming the loan affected 
the price paid by the buyer. The appraiser must ask whether the buyer 
paid a higher price because the seller paid off the loan amount. In the 
converse situation where the buyer assumes responsibility for the 
assessment, the appraiser would ask, did the buyer pay less because the 
buyer assumed the loan? * * * This is likely a form of sales or seller 
concession, and if so, recognized appraisal methodology would deduct 
this concession dollar for dollar under a `cash equivalency' basis, or 
if the market suggests the amount is less than market based on a paired 
sales analysis, the market-derived adjustment would be applied.''
     Fannie Mae asserted that ``PACE loans would increase the 
severity of Fannie Mae's losses in the event of foreclosure on the 
mortgage loan. Subsequent owners of PACE-encumbered properties are 
liable for continuing payments on the PACE loan. In selling real estate 
owned (REO), Fannie Mae will need to: (i) Cure any arrearages on the 
PACE loan and keep it current to convey clear and marketable title to a 
purchaser; and (ii) in Fannie Mae's opinion, pay off the entire amount 
of the PACE loan to attract purchasers, given the number of properties 
on the market which are not encumbered by PACE loans.''
     The Joint Trade Association asserted that ``If a homeowner 
were to sell the property before the PACE lien is extinguished, the 
property value would be reduced accordingly, so the homeowner would 
realize less on the sale * * *. [PACE advocates] also argue[ ] that the 
PACE lien would be largely immaterial to the GSEs, even in a mortgage 
foreclosure, because PACE loans do not accelerate upon default. This 
ignores the fact that the property would retain an unsatisfied PACE 
lien that diminishes the property value. That diminished value would be 
a cost to the GSE.''
     The NAHB asserted that ``A home buyer who wants to 
purchase a home with a PACE first lien is at a disadvantage * * *. 
Potentially, the home cannot be sold or the sales price might be 
reduced by the amount necessary to pay off the PACE lien.''
d. Underwriting Standards for PACE Programs
    Many commenters asserted that underwriting standards for PACE 
programs would mitigate or eliminate any financial risk first-lien PACE 
programs would otherwise pose to mortgage holders. Such comments 
included responses to Questions 14, 15, and 16 set forth in the ANPR.
     Placer County, CA asserted that ``The FHFA undervalues the 
measures built into the County's PACE program to protect private 
lienholders. The FHFA is inappropriately discounting the safeguards 
built into the County's PACE program. As explained above, the County's 
underwriting criteria are designed to protect the entire range of 
County constituents.''
     Sonoma County, CA asserted that ``Like every other PACE 
program,

[[Page 36094]]

Sonoma County has adopted a set of conditions and restrictions for 
eligibility for PACE programs. These restrictions and conditions appear 
to work well, and in our view adequately protect the interest of 
mortgage lenders.''
     The Florida PACE Funding Agency, an interlocal agreement 
between Flagler County and City of Kissimmee, cites no impact from PACE 
programs on the regulated entities, cites the legislative history of 
Florida's PACE statute, notes the ``prequalification'' standards that 
mirror the core ``consumer'' protections noted by other PACE 
supporters--no delinquent taxes, no involuntary liens, and no default 
notice and current on debt--and that lending is limited to 20% of the 
``just value'' of the property, an appraised value that is reportedly 
less than fair market value. Property owners must provide holders or 
mortgage servicers 30 days prior notice of entering ``into a financing 
agreement.'' The Agency appended several studies on the attractiveness 
of energy-efficient properties, with many improvements as part of 
deferred property maintenance that reduces the impact of a PACE 
financing, as work would be required in any event. The Agency asserted 
that its guidelines for entering into a financing agreement is 
undertaken in a protected environment, noting that Florida's approach 
``unlike the enabling legislation in most (if not all) of the other 
states which authorize PACE type programs, deliberately undertook the 
adoption of a statutory regimen designed to protect property owners, 
local governments and mortgage lenders.'' As to alternative programs, 
the comment letter advances that government grants can be a viable 
alternative, but that such programs are either not available or not 
available on a sustainable basis.
     The letters from Senators Bennet, Chris Coons, Jeff 
Merkley and Mark Udall indicated that while PACE assessments are not 
loans, and ``reasonable safety and soundness standards can be developed 
that both encourage widespread use of PACE, but also maintain the 
security of home mortgage lenders.''
    Many such comments suggested that FHFA should adopt certain 
existing guidance as standards (often Guidelines published by the U.S. 
Department of Energy or set forth in H.R. 2599) or participate in 
initiatives with the government and private sector to develop 
appropriate standards.
     The City of Palm Desert, CA directed FHFA to ``the DOE 
Guidelines and H.R. 2599, for the factors recommended for eligible PACE 
financing.''
     Leon County, FL asserted that ``PACE program `best 
practices' have been developed that ensure stability and manage risk 
for both governments and mortgage lenders concerning PACE programs. 
These best practices include: White House Policies, Department of 
Energy's ongoing Guidelines for Home Energy Professionals project 
establishing strong national standards for retrofit work, and efforts 
by states and local governments to develop their own best practices 
during PACE program implementation.''
     The Sierra Club asserted that ``DOE issued guidelines for 
PACE programs on May 7th, 2010 after meeting with Fannie Mae, Freddie 
Mac, financial regulators and PACE stakeholders. Further standards can 
be incorporated from H.R. 2599, the PACE Assessment Protection Act of 
2011 from the current Congress.''
     The Solar Energy Industries Association indicated support 
for the DOE and White House guidelines for PACE as well as H.R. 2599. 
The comment adds that improvements to PACE programs could be made by 
allowing them to include ``pre-paid purchase agreements'' and leasing 
programs. For solar energy leasing, SEIA indicated that ``The system 
owner may be able to provide solar energy for less than it would cost 
the homeowner to purchase a system outright, thereby needing a lesser 
PACE lien.'' Both pre-paid purchase agreements and leases ``leave[] the 
homeowner with no additional costs to pay [for] monitoring, 
maintenance, and insurance of the system, as these elements are 
included within a PPA or lease contract.''
     PACENow stated that FHFA ``fails to note that no such 
`uniform national standards' exist for any other type of municipal 
assessment project and ignores the extensive efforts among PACE 
proponents, the White House, and the U.S. Department of Energy (among 
others) to do exactly that.'' PACENow then proceeds to endorse 
standards set forth in H.R. 2599 that would establish certain 
standards, indicating that ``The risks of lenders and homeowners are 
clearly intertwined, and PACE programs have and can be designed to 
mitigate them.'' Similarly, the U.S. Department of Energy notes in a 
cover letter to its comment letter that it urges FHFA to work with the 
Department and others to ``ensure that pilot PACE programs are 
implemented with appropriate safeguards as outlined in the DOE 
Guidelines for Pilot PACE Financing Programs.''
     The DOE urged FHFA to work with the Department and others 
to ``ensure that pilot PACE programs are implemented with appropriate 
safeguards as outlined in the DOE Guidelines for Pilot PACE Financing 
Programs.''
     The Great Lakes Environmental Law Center asserted that 
``if federal level conditions and restrictions should be found 
necessary, the Department of Energy (DOE) has already outlined ten PACE 
program design best practice guidelines in 2010 that minimize the risk 
to all parties.''
    Other comments suggested specific underwriting criteria that the 
commenter asserted would be appropriate.
     The City of Palm Desert, CA asserted that ``One important 
underwriting standard we believe should be included in a national set 
of underwriting standards is an expected savings-to-investment ratio 
greater than one. Calculated as estimated savings on the borrower's 
cash flow due to the energy improvement, divided by the amount financed 
through the PACE assessment, a projected savings-to-investment ratio of 
greater than one increases the projected income of the borrower and 
places a mortgage lender in a more secure position than without the 
PACE participation.'' The City also asserted that ``In some respects, a 
projected savings-to-investment ratio for a PACE improvement, while not 
constituting a guarantee of results, may be more predictable than a 
borrower's continued level of income over the term of a mortgage,'' and 
that ``There are very minimal costs attendant to requiring PACE 
programs to include the protections of a savings-to-investment ratio of 
greater than one, a maximum term of the PACE assessment not exceeding 
the reasonably expected useful life of the financed energy 
improvements, non-acceleration of the PACE assessment, eligibility 
criteria for improvements that are climate-specific, and a minimum 
equity requirement such as the 15% requirement in H.R. 2599.''
    Some comments asserted that common PACE program underwriting 
standards may not take into account common indicia of good credit or 
ability to repay the obligation out of income.
     A joint letter from the National Consumer Law Center and 
the Consumer Federation of America asserted that PACE underwriting to 
exclude bankruptcy was inadequate and PACE programs ``are usually not 
engaging in full underwriting nor assessing the homeowner's actual 
ability to pay.'' The letter notes that ``PACE proposals would require 
that estimated energy savings equal or exceed the monthly PACE 
obligations, but these are estimates only.''

[[Page 36095]]

e. Empirical Data Relating to Financial Risk
    Many commenters suggested that existing data and metrics support 
PACE programs, while others asserted that the absence of reliable 
metrics and data supports the need to implement PACE programs, 
including as pilot programs.
    Submissions by PACE proponents often asserted that the default 
experience of existing PACE programs suggests that first-lien PACE 
programs do not materially increase the financial risks borne by 
mortgage holders. For example:
     Sen. Leahy, Sen. Sanders, and Congressman Welch asserted 
that ``a study by the American Council for an Energy-Efficient Economy 
demonstrated that default rates by participants in energy efficiency 
finance programs are `extremely low.' ''
     Sonoma County, CA asserted that ``Actual experience of 
existing programs does not support FHFA's assumption of added risk. 
Rather, Sonoma County's experience demonstrates that properties 
enrolled in PACE programs have fewer tax and mortgage delinquencies 
than the general public * * * The County took the initiative to review 
any changes in the mortgage status of properties with PACE assessments. 
Of the 1,459 assessments placed on properties in Sonoma County, only 16 
properties showed recorded documents demonstrating uncured mortgage 
defaults, an average of 1.1%. During the same timeframe (2009 through 
2011), the average mortgage delinquency rate in Sonoma County varied 
from 8% to over 10%. As compared, then, the default rate of properties 
with a PACE assessment was much lower in comparison with overall 
properties.'' The County also asserted that ``given the very low tax 
delinquency rate and mortgage default rate on PACE properties, the 
County does not believe PACE assessments impose any additional risk on 
mortgage holders or investors in mortgage-backed securities. In fact, 
the total value of improvements, compared to the risk of possible 
default or delinquency, almost certainly leaves such investors better 
protected over all.''
     City of New York, Office of the Mayor asserted that ``The 
value of PACE-financed energy installations (less than $9,000 on 
average, or some 10% of the value of a typical underlying property) 
relative to residential mortgage debt levels also illustrates the very 
small risk posed by PACE programs to the senior lien status enjoyed by 
GSEs and other mortgage lenders. As was noted in the comments of others 
received in this proceeding, the American Council for an Energy-
Efficient Economy conducted a study that demonstrates that default 
rates by PACE program participants are `extremely low.' ''
     Jordan Institute asserted that ``Early evidence suggests 
that there is a very low risk of default for PACE assessments. Since 
many of New Hampshire's loan programs are in their infancy, it is 
difficult to obtain true default rate numbers. However, anecdotal 
evidence in New Hampshire indicates that default rates for energy loans 
in general are low or non-existent. People's United Bank has a current 
default rate of 0% for their commercial loan program. Additionally, a 
study conducted for the New Hampshire legislature showed that 
neighboring state energy loan programs had default rates much lower 
than the typical unsecured default rate of 3.5% and concluded that the 
data shows that, `the perception that energy loans carry an 
unacceptable level of risk is incorrect.' ''
     The Natural Resources Defense Council asserted that 
``Early data from existing PACE programs appears to support the 
proposition that energy improvements made through a PACE program will 
improve the position of the first-mortgage holder. PACE administrators 
from residential PACE programs in Babylon, New York, Palm Desert, 
California, Sonoma, California, and Boulder, Colorado, report that of 
2,723 properties with PACE liens there have been 24 known defaults, 
translating to a default rate of 0.88%. In comparison, the national 
percentage of mortgage loans in foreclosure at the end of the fourth 
quarter 2011 was 4.38%.''
     Placer County, CA stated that ``A survey of reliable 
sources (See Commenter's Exhibit 1) indicates that there is no evidence 
to suggest that PACE programs are greater risks than other types of 
assessments.''
     Leon County, FL asserted that ``In a recent study, the 
American Council for an Energy-Efficient Economy (`ACEEE') found that 
energy efficiency financing programs `have one of the lowest default 
rates of any loan program.' The ACEEE study analyzed 24 different loan 
programs and found default rates ranging from zero to three percent, 
which it noted `compares very favorably with residential mortgage 
default rates of 5.67 percent.' ''
    Other submissions made reference to studies of mortgage default 
rates on properties with energy-efficient characteristics that may or 
may not have been financed through a PACE program.
     Placer County, CA stated that ``According to a report by 
the Institute for Market Transformation Removing Impediments to Energy 
Efficiency from Mortgage Underwriting and Appraisal Policy, `Mortgages 
on Energy Star homes have an 11% lower default and delinquency rate 
than do comparable mortgages on other homes.' ''
    However, some submissions recognized that the lack of a substantial 
track record for first-lien PACE programs limits the amount of reliable 
data available.
     The U.S. Department of Energy stated that ``Because there 
is insufficient data and analysis available to provide conclusive 
answers, DOE seeks FHFA cooperation to facilitate work with government-
sponsored entities in the housing sector that would inform answers with 
appropriate data analysis.'' DOE further asserted that ``Insufficient 
data and analysis is available to validate a view that implementation 
of PACE programs would increase financial risk to mortgage lenders or 
that it would decrease financial risk to mortgage lenders.''
     The Environmental Defense Fund, in its comment letter, 
indicated that analytic standards are absent for PACE programs and 
suggested that FHFA's analysis ``may be hamstrung as a consequence of 
the lack of analytic standards for projecting, ensuring, and measuring/
verifying the anticipated and realized energy savings in residential 
PACE programs nationwide.'' The comment continued, ``Our experience has 
led us to identify the lack of uniform, accepted methods as a crucial 
barrier to such financing by banks in several other sectors, including 
large commercial buildings and multifamily residential buildings.'' The 
Fund then explored its efforts in support of an Investor Confidence 
Project to develop specifications for baseline energy use and other 
measuring devices and ``a more uniform approach to project engineering 
[which] can be expected to generate more comparable data, facilitating 
the actuarial-level analysis that the Agency and other interested 
parties will want to perform * * *. We recommend the promulgation of 
best practices for M&V [measurement and verification].'' The Fund calls 
on FHFA to use its powers to ``advance the understanding of energy and 
climate risks as well as the value and cost of mitigation measures * * 
*''
     The Town of Babylon, NY asserted that: ``FHFA has pointed 
out that over two dozen states have passed PACE enabling legislation. 
No note was taken, however, that but a handful of PACE programs have 
gone operational. This consequence is due primarily to various 
statements issued by Fannie Mae and

[[Page 36096]]

Freddie Mac in May of 2010 followed by warnings issued by FHFA and OCC 
on July 6, 2010. Therein lies the Catch-22; FHFA requires a caliber of 
credible data that can only be forthcoming from clinical trials which 
it has, effectively, prohibited.''
2. PACE Programs and the Market for Financing Energy-Related Home-
Improvement Projects
    Many commenters asserted that PACE programs address a market 
failure by overcoming barriers to financing cost-effective projects, 
most frequently citing the high up-front costs of energy-efficiency 
improvement and the possibility that a homeowner would move before the 
payback period of such a project was complete as barriers that PACE 
would overcome. Such comments included responses to Questions 5, 6, 7, 
and 8 set forth in the ANPR. Examples of these comments include the 
following:
     The California Attorney General asserted that California's 
legislature, in authorizing PACE programs, had found that ``The upfront 
cost of making residential, commercial, industrial, or other real 
property more energy efficient prevents many property owners from 
making those improvements.''
     The Natural Resources Defense Council asserted that 
``Compared to other available energy efficiency and renewable energy 
financing mechanisms, PACE is attractive to homeowners because it 
provides for 100% of the upfront costs for home energy improvements and 
PACE liens are transferable to subsequent owners in the event of sale 
or transfer of the property.'' The Council stated ``In contrast to 
`home equity' financing or traditional asset-backed debt, PACE 
financings provide full upfront costs for the energy improvements and, 
by design, in the event of sale or transfer of the property, the 
remaining balance on the PACE lien can be transferred to subsequent 
owners or paid off in full. This will be attractive to some property 
owners who would otherwise be concerned that they would be responsible 
for paying off the full PACE lien when subsequent owners will be the 
beneficiaries of the energy improvements. Moreover, equity and 
traditional debt both require some financial outlay from property 
owners (such as down payments), but neither of those options nor are 
necessarily or automatically transferable to subsequent owners.''
     Sonoma County, CA asserted that ``Although * * * there are 
energy mortgage products available, they do not appear to have captured 
any significant market segment. Thus in the current market there 
appears to be a stark choice: If PACE programs can proceed, energy 
improvement projects can be done.''
     Leon County, FL asserted that ``Without access to private 
capital, there will be limited funding for efficiency retrofits * * * 
The single family residential sector is not restricted by a lack of 
financial products. Numerous unsecured second[-] and first-lien 
products are available to finance energy efficiency improvements. 
However, the sector is restricted by: (1) High interest rates 
associated with the financing; and (2) the fact that many of these 
financing products are cumbersome and difficult to access.'' The County 
also asserted that ``Because of the extended payback periods of many 
energy efficiency retrofits and because many energy efficiency lending 
products come with lending terms of less than 10 years, it is difficult 
or impossible to offer borrowers positive cash flow (in which periodic 
energy savings exceed debt service payments) as soon as they install 
their retrofits. As a result, a homeowner rarely will purchase an 
energy efficiency retrofit based only on energy savings. Long loan 
terms and low interest rates are the `answer,' which PACE programs 
provide.''
     Boulder County, CO asserted that ``Many residents are 
unwilling to take on debt for energy efficiency upgrades because the 
benefits of the investment do not follow them if they decide to sell in 
the future. Unlike traditional financing, PACE-financed improvements 
have the notable advantage that the assessment stays with the property 
upon sale * * *. This overcomes one of the strongest traditional 
barriers to implementing energy efficiency and renewable energy 
projects in American homes today.''
     Alliance to Save Energy et al. asserted that ``The primary 
lien provides further assurance to investors and is a much safer 
investment than an unsecured loan, allowing for lower interest rates 
and better access to secondary markets; most other financing programs 
require subsidization to get to workable financial terms. As the 
financing is tied to the property, rather than to the property owner, 
the owner can consider payback periods that may be longer than his or 
her tenure at the property.''
     Renewable Funding LLC asserted that ``PACE is uniquely 
attractive as a financing tool because it solves the two big problems 
that have prevented wide scale adoption of energy efficiency and 
renewable energy retrofit projects: [1] Upfront Cost: PACE financing 
eliminates the high upfront cost of energy efficiency and renewable 
energy upgrades and provides attractive long-term financing that makes 
projects cost effective much sooner. [2] Transfer on Sale: Because the 
average homeowner moves every 5-7 years, many are reluctant to invest 
in large energy upgrades unless they are certain they will remain in 
their home. Because PACE, like other municipal assessments, stays with 
the property upon sale, the new owner will assume the assessment 
payments if the property is sold.''
     National Association of Realtors asserted that ``PACE is 
an innovative approach that helps to resolve on[e] [of] the major 
obstacles to market-wide spread of energy efficiency improvements--
i.e., the split incentives market failure: Owners opt not to invest 
because they are afraid they won't be able to recoup the full 
investment if they are planning to sell the property. By having access 
to financing that conveys with the sale of the property, there is a 
potential to improve the energy efficiency of homes.''
     The Sierra Club asserted that PACE reduces ``uncertainty 
for a homeowner that does not know how long they will remain in their 
home.''
    Other commenters asserted that there are alternatives to first-lien 
PACE programs in the existing marketplace for credit-worthy borrowers 
to finance cost-effective projects.
     The Joint Trade Association comment noted that ``For 
homeowners with the means to finance an energy retrofit project without 
a PACE loan, the alternative financing likely would have a lower cost 
and much more flexibility, such as a shorter term and the ability to 
prepay the loan. A shorter term and the ability to prepay the loan 
would both reduce its cost. This flexibility would also permit the 
homeowner to sell the property without diminishing the sales price to 
reflect the outstanding PACE loan * * *. PACE loans, then, are directed 
at those who cannot qualify for non-PACE financing. These are the 
borrowers for whom PACE loans would be the most dangerous.'' The 
comment also noted that alternative financing would likely have lower 
costs, more flexibility in loan term periods and lower risk to 
homeowners; the comment cited alternatives such as the Section 203(k) 
insured home improvement loan from the Federal Housing Administration 
and other energy efficient mortgage products. The comment criticized 
any PACE program that prohibited pre-payments as running contrary to 
the spirit of Dodd-Frank Act limitation on pre-payment penalties.

[[Page 36097]]

     A joint letter from the National Consumer Law Center and 
the Consumer Federation of America asserted that PACE loan rates were 
not that competitive and a survey found that ``many homeowners with 
equity in their homes would likely have been able to borrow against 
their home equity at lower rates.'' The comment also stated 
``Homeowners who could take out a PACE loan may also have other routes 
for borrowing funds which do not raise the same concerns as PACE loans 
do.'' Finally, the comment stated, ``we are concerned that state and 
local governments will be unequal to the task of monitoring the sales 
tactics and behavior of the many contractors who will no doubt be 
attracted by the availability of PACE financing * * *. With PACE loans 
having a senior position, [consumer] ownership of their homes could be 
jeopardized.''
3. Legal Attributes of PACE Assessments
    Many commenters asserted that PACE assessments reflect a legally 
proper use of state taxing authority.
     Boulder County, CO asserted that ``Other special districts 
allow property owners to act voluntarily and individually to adopt 
municipally financed improvements to their property that are repaid 
with assessments. PACE special assessment districts are not 
significantly distinguishable from special assessment districts in 
other contexts, including special assessment districts designed to fund 
septic systems, sewer systems, sidewalks, lighting, parks, open space 
acquisitions, business improvements, seismic improvements, fire safety 
improvements, and even sports arenas. Such special districts have been 
in existence since 1736, and are typically created at the voluntary 
request of property owners who vote to allow their local governments to 
finance improvements that serve a public purpose, such as energy 
efficiency improvements. * * * All special assessments collected for 
special improvement districts are secured by liens which are senior to 
the first mortgage, and therefore FHFA's characterization of PACE as 
having a `lien-priming' feature is misleading.''
     Alliance to Save Energy et al. asserted that ``While the 
FHFA frequently has referred to PACE assessments as `loans,' they are, 
in fact, property assessments. Much of the rationale offered against 
PACE financing could be applied to a range of traditional property tax 
assessments upon which municipalities depend for critical 
infrastructure projects. As such, the precedent set by the FHFA's 
rejection of the PACE financing model raises serious concerns for other 
land-secured financing, e.g. for municipal sewer upgrades or seismic 
strengthening, which have a long history in the United States and have 
been consistently upheld by courts.''
     Placer County, CA asserted that ``The County's PACE 
program involves assessments of the type that have been lawful in 
California and in use in the County since the 1800s. * * * Chapter 29 
authorizes the use of these assessments to finance the installation of 
renewable energy, energy efficiency and water efficiency improvements * 
* * on private property. The County PACE program simply represents the 
County's exercise of its long-held and used tax and assessment power 
for a public purpose. * * * The FHFA's response is unprecedented. The 
County has levied taxes and assessments to achieve important public 
purposes, such as the construction of schools, the installation of 
water and sanitary sewer systems and the undergrounding of public 
utilities, for more than 100 years. The FHFA's response to the County's 
exercise of its taxing power, as evidenced by the Statements and the 
Advance Notice of Proposed Rulemaking, is an unprecedented interference 
with the County's exercise of its taxing power to achieve valid and 
important public purposes.''
     Sonoma County, CA asserted ``FHFA's objection to PACE 
programs begins with the assumption that PACE assessments are different 
than `traditional' assessments. This assumption is incorrect.'' The 
County also stated ``FHFA contends that PACE assessments are different 
because a property owner voluntarily joins the program and agrees to 
install the energy improvements. This is no different from many 
existing assessment statutes. Generally, initiation of assessment 
proceedings requires a petition by some percentage of affected property 
owners.'' The County advanced that ``FHFA contends [PACE] financing is 
a loan, therefore requiring treatment and evaluation as a loan, with 
focus on the creditworthiness of the borrower. However, as a matter of 
law, the PACE transaction is an assessment, not a loan. It is a land-
based and land-secured transaction.''
     Leon County, FL asserted ``The authorization for these 
land-secured assessments and the creation of districts to effectuate 
those purposes is a function of state law. State legislatures have the 
power to create tax liens and determine their priority relative to that 
of other types of liens and property interests, even if the tax lien 
was created after other property interests came into existence. Under 
Florida law, a local government is expressly authorized to levy 
assessments for `qualifying improvements,' including energy efficiency 
and related improvements. There is longstanding precedent in federal 
and state law regarding a local government's authority to levy non ad 
valorem or special assessments. Recasting these assessments as `loans' 
runs counter to these long-established principles of law protecting 
local governments' rights to create PACE programs.''
    Several of the comments asserted that the voluntary nature of a 
PACE transaction does not distinguish PACE assessments from other, more 
traditional assessments.
     The Natural Resources Defense Council noted that ``As of 
2007, there were more than 37,000 special assessment districts in the 
United States. For decades, municipalities have utilized these 
districts to create financing mechanisms for voluntary improvements to 
private property that serve a public purpose.'' The NRDC stated that 
``Given this long-standing existence of special assessment districts 
which mirror the intent and structure of PACE, the legality of PACE 
programs rests on firm legal and historical precedent. FHFA's effort to 
single out PACE programs for disapproval, alone out of all the other 
special assessment programs that exist across the country, is illogical 
and unsupportable.''
     The Sierra Club asserted that ``The ability to opt-in [is] 
not a distinguishing feature of land secured municipal finance. Many 
past programs have allowed participation according to preference, 
without requiring it to gain full benefit.''
     Vote Solar asserted that ``In 1988, the City of Torrance, 
California, created a special assessment district which allowed private 
property owners to voluntarily apply to receive funding for seismic 
retrofits on their buildings. Assessments were made only against 
parcels for which the property owner applied to become a part of the 
district, and the property owners individually contracted for the 
projects.'' The commenter also asserted that ``Under the Massachusetts 
`Community Septic Management Plan,' the purpose of which is to prevent 
water pollution, property owners can voluntarily undertake upgrades to 
their septic systems and receive financing from the local government, 
and assessments, secured by a property lien, are placed on the 
participating owners' parcels. And since 2001 in Hamburg Township, 
Michigan, property owners can apply to

[[Page 36098]]

receive financing for the cost of connecting to the local sewer system 
by agreeing to participate in a `Contract Special Assessment District.' 
''
     Renewable Funding asserted that ``recent examples include 
voluntary programs for septic upgrades in Virginia and seismic 
strengthening for homes in California.''
    Other commenters found the voluntary nature of PACE assessments to 
be a distinguishing feature.
     The Real Estate Roundtable asserted that ``As a voluntary 
program to finance retrofits of private buildings, PACE is unlike other 
common forms of tax assessment financing.''
    Additional commenters asserted that first-lien PACE programs 
present challenges to the legal structures and processes associated 
with residential property transfers.
     The American Land Title Association (ALTA) asserted that 
the ``priority priming feature of PACE loans introduces a new level of 
risk above and beyond the scope of the standard title insurance 
policy.'' ALTA noted that PACE statutes are unclear on the recording of 
PACE obligations in local property records and that loans or 
refinancing may be delayed as searches would have to be undertaken to 
find indication of whether a PACE loan had been placed upon the 
property.
     Further, ALTA noted that ``Without establishing standards 
for determining title to property, PACE loans run the risk of 
significant losses due to fraud. In addition to harming PACE 
participants, it also damages the accuracy of local property records, 
and results in increased cost of underwriting, claims, escrow services 
and compliance for the land title industry.
     ALTA also raised the issue of whether the Real Estate 
Settlement Procedures Act should apply to PACE financing as pursuant to 
12 U.S.C. 2602(1)(B)(ii) any assistance by the federal government to a 
PACE program, including federal tax benefits for the interest paid by 
the borrower or interest earned by an investor on a bond backed by PACE 
loans may require compliance with RESPA because such benefits would 
make the PACE financing a ``federally related mortgage loan.''
     The National Association of Realtors asserted that 
``Because these PACE loans runs with the property and not with the 
property owner, the information on the tax assessment about the loan 
will need to be explained for each new buyer. If we assume that the 
average home is sold every five years, and the average length of the 
PACE loan is 20 years, then the Realtor will be responsible for 
explaining this special tax assessment an average of four times over 
the life of the loan. Once the prospective buyer learns about this new 
cost to purchasing the home, this information may cause delays in the 
completion of the transaction or even a cancellation.''
4. Public Policy Implications of PACE Programs
a. Environmental Implications of PACE Programs
    Many commenters asserted that PACE programs are environmentally 
beneficial.
     Citizens Climate Lobby advanced that ``There are 
significant environmental impacts that must be fully evaluated and 
mitigated for the project rule making. FHFA's rule to prohibit PACE 
programs nationwide results in measureable and significant air 
pollution emissions that impact human health and the environment. 
Blocking the PACE Program nationwide has resulted in significant losses 
in otherwise saved energy efficiency. The significant air pollution 
emissions discriminately impact poorer communities of color living 
closer to the energy combustion sources nationwide. In the alternative 
of not prohibiting PACE programs measurable GHG emissions reductions 
would have been realized and climate change mitigated. This is a 
critical concern because there is scientific support showing that we 
closely approach a tipping point to unredeemable destruction.''
     Placer County, CA stated that ``The California Legislature 
and the County believe that PACE will accelerate the installation of 
PACE improvements and, as a result, accelerate the environmental 
benefits achieved by PACE improvements. Many of our constituents, 
including contractors who install PACE improvements and have been 
frustrated by the absence of affordable financing for PACE 
improvements, share this expectation.''
     Center for Biological Diversity noted that ``PACE programs 
are critical tools in addressing climate change because energy related 
home improvements reduce greenhouse gas emissions. Reduction of 
greenhouse gas emissions protects biological diversity, the 
environment, and human health and welfare.''
     Ygrene Energy Fund asserted that with respect to ``recent 
weather disasters,'' ``hurricane and tidal surges,'' ``heat waves and 
associated fires,'' and ``long term public health issues,'' ``PACE 
programs can reduce the occurrence of such tragedies and loss by 
providing a means for making homes more energy efficient from something 
as simple as better insulation and modern heating units. This directly 
furthers the stated FHFA goal of maintaining or increasing both asset 
value and actual property protection.''
     Decent Energy Incorporated noted that the environmental 
impact of energy efficiency measures should be identical without regard 
to the financing mechanism, except where lower cost financing permits a 
homeowner to expand the number of improvements. The commenter supported 
energy audits performed by auditors certified by the Building 
Performance Institute and present prospective financial information on 
the performance of renewable energy systems. He cited the absence of 
strong protections for homeowners with respect to home improvement 
projects, which PACE might address. Finally the commenter noted the 
value of using the National Renewable Energy Lab BESTEST-EX, an energy 
analysis tool, developed for DOE.
    Other commenters asserted that environmental effects flow from the 
underlying projects, not the method of finance.
     The Joint Trade Association comment letter challenged 
whether financing methods have anything to do with environmental 
benefits. Other financing methods might prove ``more advantageous'' for 
homeowners and the environment.
b. Implications of PACE Programs on Energy Security and Independence
    Many commenters asserted that PACE programs support goals relating 
to United States energy security and independence.
     Metropolitan Washington Council of Governors asserts that 
``PACE is an essential state and local public policy tool that promises 
to conserve natural resources, increase energy security, reduce the 
health and environmental impacts of energy consumption, stabilize 
residential energy spending, and promote economic growth in our 
communities.'' The Council continues, urging FHFA ``to reconsider your 
position on PACE programs to enable use of this innovative municipal 
financing tool, thereby encouraging homeowners to increase our nation's 
energy independence and clean energy generation.''
     Board of Supervisors, County of Santa Clara, CA asserts 
that ``PACE financing * * * is a means to grow the green economy that 
now drives the economic expansion of other countries, to promote energy 
efficiency and independence, and to redirect

[[Page 36099]]

unnecessary energy expenditures to the pressing needs of families.''
     Renewable Funding LLC asserted that ``PACE also helps 
achieve important state and local government energy policy goals that 
may include: * * * [1] Energy independence from foreign sources; [2] 
Energy security for states by limiting reliance on inter-state energy 
transfers and strain on distribution systems; [3] Avoided costs of 
building new power plants; [4] Lower demand on the energy grid * * *.''
c. Macroeconomic Implications and Effects of PACE Programs
    Many commenters asserted that PACE programs would bring 
macroeconomic benefits such as increased domestic employment generally 
and/or employment in specific sectors such as ``green jobs.''
     Boulder County, CO asserted that Boulder's ClimateSmart 
Program ``generated green-collar jobs and stimulated the local and 
state economy. Nearly $6 million of the total money distributed in 2009 
funded energy efficiency upgrades and almost $4 million went to 
renewable energy projects, all of which boosted the local economy and 
provided job opportunities for more than 290 installers, contractors 
and vendors. In addition, 75% of the ClimateSmart Program bonds were 
sold locally, providing excellent local green investment opportunities. 
Finally, given that a vast majority of the work was completed by the 
local workforce, we believe that recirculation of project dollars 
within our community has occurred, producing a positive economic ripple 
effect. In contrast, approximately 75 cents on the dollar currently 
leaves the Boulder County community when residents and businesses pay 
their utility bills.''
     Boulder County, CO asserted that ``according to a May 2011 
Department of Energy study, the Boulder County ClimateSmart Program 
created more than 290 jobs, generated more than $20 million in overall 
economic activity, and reduced consumers' energy use by more than 
$125,000 in the first year alone. In developing a rule that serves the 
public interest, the FHFA should weigh perceived risks associated with 
this lending model against the proven economic benefits that may reduce 
default rates.''
     Renewable Funding LLC noted that ``A national study 
conducted by Portland-based economics consulting firm EcoNorthwest 
concluded that if $1 million were spent on PACE improvements in each of 
four American cities, it would generate $10 million in gross economic 
output; $1 million in combined Federal, state and local tax revenue; 
and 60 jobs. A simple extrapolation from this study shows that if just 
1% of America's 75 million homeowners completed a typical PACE project, 
it would create more than 226,000 jobs, generate more than $4 billion 
in Federal, state and local tax revenue and stimulate more than $42 
billion in new economic activity.''
     CA Energy Efficiency Industry Council: ``If PACE is fully 
implemented, tens of thousands of much-needed green jobs will be 
created, and the financial health of our residential mortgage portfolio 
will be improved.''
     The National Resources Defense Council noted that it 
``recognizes that retrofitting our existing building stock can be a key 
driver of economic recovery in the United States through the 
proliferation of green jobs and by saving property owners (including 
NRDC's members) thousands of dollars annually on energy bills.''
     The Sierra Club asserted that ``PACE programs can 
potentially provide significant economic benefits to communities * * * 
[and] [l]ocal government can implement these programs through long-
accepted land secured municipal finance districts.

IV. FHFA's Response to Issues Raised in the Comments

    FHFA appreciates the time and effort of the commenters in preparing 
the submissions, and has considered the comments carefully. The many 
perspectives and varied information offered in the comments have 
assisted FHFA in its consideration, pursuant to the Preliminary 
Injunction, of 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's views and judgments as to the 
principal substantive issues raised in the comments are set forth 
below.

A. Risks PACE Programs Pose to Mortgage Holders and Other Interested 
Parties

    FHFA's supervisory judgment continues to be that first-lien PACE 
programs would materially increase the financial risks borne by 
mortgage holders such as the Enterprises.
1. Effects of PACE-Funded Projects on the Value of the Underlying 
Property
    Having reviewed the comments, FHFA is of the opinion that first-
lien PACE programs allocate additional risk to mortgage holders such as 
the Enterprises because it is uncertain whether PACE-funded projects 
add value to the underlying property that is commensurate to the amount 
of the senior property-secured PACE obligation and that could be 
realized in a sale (including a sale resulting from a foreclosure). 
Because of the lien-priming attribute of first-lien PACE programs, if 
the dollar amount of a first-lien PACE obligation exceeds the amount 
which the PACE-funded projects increases the value of the underlying 
property, the collateral has been impaired, which causes the mortgage 
holder to bear increased financial risk.
    Many commenters asserted that PACE-funded improvements increase the 
value of the underlying property. Several such comments cited studies 
suggesting that the presence of energy-efficient features or 
improvements correlates positively with property value as reflected in 
sales price data. See, e.g., Vote Solar submission at 6-7 & nn. 20-22. 
However, these studies did not directly compare the purported value 
increment with the cost of the underlying project, and, therefore, 
these studies do not directly address the question of the net (rather 
than gross) valuation effects of such projects. FHFA considers net 
valuation effects (i.e., the increment in the value of the property 
less the amount of the additional obligation) to be of far greater 
relevance to the issue of the financial risk posed to mortgage holders.
    Having reviewed the cited studies, FHFA's judgment is that the 
available information does not reliably indicate that PACE-funded 
projects will generally increase the value of the underlying property 
by an amount commensurate with their cost. As Freddie Mac stated in its 
submission, ``We are not aware of reliable evidence supporting a 
conclusion that energy efficiency improvements increase property values 
in an amount equal to the cost of the improvement. Rather, our 
experience with other home improvements suggests that any increase in 
property value is likely to be substantially less than such cost, 
meaning that homeowners who take on PACE loans are likely to increase 
their ratio of indebtedness relative to the value of their 
properties.'' Freddie Mac submission at 4.
    A publicly available cost-versus-value report illustrates the 
point. See Remodeling/NAR Cost-vs.-Value Survey 2011-12.\12\ That 
report indicates that

[[Page 36100]]

window-replacement projects--which are approved for financing under 
many PACE programs--typically add less than 70% of the cost of the 
project to the value of the property. Id. More specifically, the survey 
reports that, as a national average for 2011, mid-range wood window-
replacement projects cost about $12,200 while adding only about $8,300 
of value to the property. Id. A PACE-financed window-replacement 
project with those cost and value effects would diminish the amount of 
property value securing the mortgage by about $3,900--the difference 
between the $12,200 cost and the $8,300 increment to value.
---------------------------------------------------------------------------

    \12\ Available at https://www.remodeling.hw.net/2011/costvsvalue/national.aspx (last visited June 11, 2012).
---------------------------------------------------------------------------

    Moreover, FHFA's judgment is that PACE-funded projects create 
financial risk and uncertainty for mortgage holders because the future 
value of the project depends on an array of events and conditions that 
cannot be predicted reliably. In part, this is because the principal 
channel by which PACE projects could affect property value is by 
reducing the homeowner's utility expense. The amount of any such 
reduction depends, in large part, on the level of energy prices over 
the life of the project. Energy prices are variable and unpredictable, 
and therefore any forward-looking estimate of utility-cost savings is 
inherently speculative. See NRDC, PACENow, Renewable Funding, LLC, and 
The Vote Solar Initiative, PACE Programs White Paper (May 3, 2010) at 
18 (noting that because ``the PACE assessment remains fixed,'' cash-
flow ``benefits'' to homeowners depend upon movements in the ``cost of 
energy'').\13\ Further, whether the retrofit equipment is effective, is 
maintained by the homeowner or is covered by hazard insurance are 
important factors in the valuation of an improvement. Accordingly, the 
effect a PACE-financed project might have on property values is likely 
to be similarly variable and speculative. Additional discussion of the 
cash-flow effects of PACE-funded projects appears infra in section 
IV.A.2.
---------------------------------------------------------------------------

    \13\ Available at https://pacenow.org/documents/PACE%20White%20Paper%20May%203%20update.pdf.
---------------------------------------------------------------------------

    In addition, the effect a PACE-financed project will have over time 
on the value of the underlying property also depends on the preferences 
of potential home purchasers, which can change over time. Indeed, 
prominent PACE advocates have publicly acknowledged ``uncertainty as to 
whether property buyers will pay more for efficiency improved 
properties.'' See PACE Finance Summary Sheet at 1.\14\ Many PACE-
financed projects, such as solar panels or replacement windows, have a 
relatively long engineering life, and technological advances or 
changing aesthetic preferences will likely affect their desirability to 
potential homebuyers. If such features fall out of favor or become 
obsolete, any positive contribution to property value could dissipate, 
and indeed the presence of such features could reduce the value of the 
property. As the Joint Trade Association explained, ``Early in the life 
of a PACE loan, the technology used in a retrofit application may 
become obsolete, but the PACE loan would remain because it is not 
prepayable. As technology advances, consumers' preferences will change. 
A solar panel that seemed attractive at first but that became obsolete 
will hurt property liquidity and value, both because the property has 
an undesirable and obsolete solar panel, and because the PACE lien 
would still be outstanding.'' For example, many buyers do not want 
solar systems or other expensive energy improvements because the 
assumed savings may not materialize, and they may have concerns about 
the aesthetics, maintenance requirements, or technology that may become 
outdated or fall in price. The cost of solar systems has come down 
substantially in recent years; if prices continue to fall, a homeowner 
that locked-in a higher cost system would have difficulty getting a 
buyer to assume that higher balance assessment, without a pricing 
concession.
---------------------------------------------------------------------------

    \14\ Available at https://pacenow.org/documents/PACE%20Summary%20Description%20for%20Legislators.pdf (last visited 
June 11, 2012).
---------------------------------------------------------------------------

    Many commenters also assert that the fact that PACE obligations do 
not accelerate upon default mitigates the risk to mortgage holders, 
since only the past due amounts rather than the entire obligation would 
become immediately due in foreclosure. See supra Section III.B.1.c 
(summarizing comments). FHFA believes that such comments are based on 
flawed economic analysis; whether PACE obligations are accelerated in a 
foreclosure is, in FHFA's judgment, of limited economic irrelevance. 
Upon any transfer of a property to which a PACE obligation has 
attached, the new owner assumes the continuing obligation to pay the 
PACE assessments as they come due. Accordingly, the new owner--i.e., 
the purchaser in a foreclosure sale--will reduce the amount he or she 
bids for a given property to account for his or her assumption of the 
continuing obligation to pay PACE assessments. A rational purchaser 
will treat the PACE obligation as a component of their cost, and will 
reduce their cash bid correspondingly. Because the cash paid by the new 
owner is the source of all funds the mortgage holder will realize upon 
foreclosure, the reduction in purchase price corresponding to the PACE 
debt will be borne entirely by the foreclosing mortgage holder, not by 
the new owner.
2. Cash-Flow Effects of PACE-Funded Projects
    FHFA believes first-lien PACE programs allocate risk to mortgage 
holders such as the Enterprises because it is uncertain whether PACE-
funded projects increase the borrower's free cash flow. If the 
borrower's free cash flow does not increase, then (all else equal) his 
or her ability to service financial obligations including the mortgage 
and the PACE obligation does not increase. Some solar systems or 
geothermal systems with life cycle periods that may exceed the term of 
a loan, which PACE advocates favorably cite, may require intervening 
replacement of system elements and repairs; these further highlight the 
need for a free cash flow analysis that is positive for homeowners. 
Having reviewed the comments and the sources cited therein, FHFA's 
judgment is that the available information does not reliably indicate 
PACE-funded projects will generally increase the borrower's ability to 
repay his or her financial obligations, including mortgage loans.
    First, estimating utility cost savings is inherently uncertain due 
to the variability and unpredictability of energy prices, as PACE 
advocates have previously acknowledged to FHFA. See Memo from 
Tannenbaum to PACE Federal Regulatory Executives (June 8, 2010) at 
4.\15\ Indeed, the May 7, 2010 DOE Guidelines (which many commenters 
urge FHFA to adopt) concede that computing the ``Savings-to-Investment 
Ratio,'' or ``SIR,'' which is meant to determine whether ``projects * * 
* `pay for themselves' * * * over the life of the assessment, depends 
upon assumptions about future energy prices.'' DOE Guidelines for Pilot 
PACE Financing Programs (May 7, 2010) at 2 & n.4. Many commenters 
asserted that energy retrofits will be economic and will not fail to 
produce benefits due to rising energy costs, but no guarantee exists 
that energy costs will increase; even a period of energy price 
stability or moderation could significantly affect the value of an 
energy retrofit. See, e.g., Comments of the Joint Trade Associations 
(asserting that ``The price of natural gas has fallen since the advent 
of extracting it from shale rock,'' and that energy prices ``can depend 
on

[[Page 36101]]

international and domestic politics and technology advances''); Decent 
Energy (acknowledging that the ``direction and magnitude of energy 
prices are uncertain''); Great Lakes Environmental Law Center 
(acknowledging that energy costs are ``highly volatile'').
---------------------------------------------------------------------------

    \15\ This document is available for inspection upon request at 
FHFA.
---------------------------------------------------------------------------

    Second, accurately estimating in advance the energy savings that 
would result from a particular PACE project at a particular property is 
difficult because of design and construction features of the existing 
property that may not be apparent until the retrofit project is 
undertaken. As the United States Department of Energy explained in a 
publicly available document:

    It is extremely difficult (and potentially expensive) to 
guarantee the forecasted level of savings for residential efficiency 
projects * * *. You can encourage quality retrofits by requiring 
specialized training for contractors and having an aggressive 
quality assurance program that checks the work. However, there is a 
tradeoff between ensuring quality and ensuring affordability. If 
work is faulty (not performing as designed), contractors need to be 
either fix their work or face consequences (such as ineligibility to 
participate in the program).\16\
---------------------------------------------------------------------------

    \16\ U.S. Department of Energy, Q&A from the November 18[, 2009] 
Energy Financing Webinar, available at https://www1.eere.energy.gov/wip/solutioncenter/pdfs/pace_webinar_qa_111809.pdf.

    Similarly, as the University of California's Renewable and 
Appropriate Energy Laboratory, which favors PACE, explained in a 
publicly available document, ``Homeowners and businesses may not trust 
that the improvements will save them money or have the other benefits 
claimed.'' See Univ. of Cal. Renewable and Appropriate Energy 
Laboratory, Guide to Energy Efficiency and Renewable Energy Financing 
Districts at 6 (Sept. 2009).\17\ See also, e.g., comments of the Joint 
Trade Associations (``disclosures about future utility costs are 
conjecture and are unreliable''); National Association of Realtors 
(``it is difficult to measure the benefits of these improvements 
because the way an owner uses energy in a home may change over time, 
depending on variables such as weather and family composition and 
whether or not the energy efficiency retrofit has become 
technologically outdated, or was ever as efficient as it was supposed 
to be'').
---------------------------------------------------------------------------

    \17\ Available at https://rael.berkeley.edu/sites/default/files/old-site-files/berkeleysolar/HowTo.pdf.
---------------------------------------------------------------------------

    Third, some homeowners may choose to consume rather than monetize 
energy efficiency gains, as by adjusting their thermostat to realize 
efficiency gains as comfort rather than as monetary savings. As the 
U.S. Department of Energy explained in a publicly available document, 
``There is great variation in how occupants respond to a retrofit (some 
may turn up the heat for example), and behavior is a large factor 
especially in residential energy use.'' \18\ Similarly, as the National 
Association of Realtors noted more generally, ``the way an owner uses 
energy in a home may change over time.'' Hence, the possibility that 
PACE-financed projects--even projects as to which the savings-to-
investment ratio as computed at the planning stage exceeds one--will 
reduce rather than enhance the homeowner's free cash flow and 
consequent ability to repay his or her existing obligations cannot be 
disregarded. Reducing the homeowner's ability to repay his or her 
existing obligations plainly increases default risk and thereby reduces 
the value of those obligations--which include mortgages--to their 
holders.
---------------------------------------------------------------------------

    \18\ U.S. Department of Energy, Q&A from the November 18[, 2009] 
Energy Financing Webinar, available at https://www1.eere.energy.gov/wip/solutioncenter/pdfs/pace_webinar_qa_111809.pdf.
---------------------------------------------------------------------------

    Fourth, PACE advocates have publicly acknowledged that it may take 
several years before projected cash-flow effects turn positive. For 
example, the City of Palm Desert California published a flyer promoting 
its PACE program, which included a ``How Does It Actually Work?'' 
section setting forth an example involving installation of ``a 3.1 kW 
photovoltaic system for a net cost of $20,000.'' According to that 
document, ``The monthly loan cost of $160 exceeds the initial monthly 
utility savings of $120.'' Palm Desert adds that ``However, by the 
seventh year, savings exceed costs.'' Palm Desert, ``A Pathway to 
Energy Independence.'' \19\ In FHFA's judgment, undertaking first-lien 
PACE financed projects expected to have negative cash-flow effects for 
the first several years in hopes that they will generate positive cash-
flow effects thereafter will not reliably enhance homeowner ability to 
pay financial obligations including mortgage loans.
---------------------------------------------------------------------------

    \19\ Available at https://rael.berkeley.edu/files/berkeleysolar/PalmDesertBrochure.pdf.
---------------------------------------------------------------------------

    Comment letters favorable to PACE programs cited economic and other 
benefits with recent studies. Many such comments cited studies 
purporting to summarize benefits of solar systems. One of the 
weaknesses of the cited studies was whether they compared the cost-
effectiveness of solar to that of other sources of energy. Despite the 
rapid fall in the price for solar panels since 2008 (due to lower raw 
material costs, large-scale production in Asia and excess supply), 
solar is still more expensive than electricity produced from coal, oil, 
natural gas, nuclear, or wind. The studies did not take into account 
the substantial government subsidies for new solar installations. Tax 
incentives and other subsidies are generally necessary for solar to be 
affordable for homeowners. The main federal subsidy covers 30 percent 
of the total solar installation costs. Other subsidies from the states 
and local governments can increase the total subsidy to more than 50 
percent. Thus, the true benefit of an energy retrofit involving solar 
may omit certain key factors that may or may not remain in place. The 
studies generally did not compare PACE financing of solar systems to 
alternative methods of financing, such as cash payments or leasing. 
Financing alternatives have varying cost structures, and may include 
administrative costs, finance charges, and maintenance charges as part 
of the package. In addition, any cost analysis of solar must account 
for the particular energy dynamics for the specific solar installation. 
The benefits to be realized are site specific (roof orientation and 
pitch, tree shading, sun hours), and region specific (electricity costs 
vary greatly throughout the country, as well as the state or local 
subsidy levels); general or typical performance metrics may not be 
applicable for a given property.
    Commenters advance that the Savings to Investment Ratio (SIR) is 
the most relevant measure for comparing the costs and benefits of PACE-
funded projects, but SIR is an assumption-driven estimate that, in 
FHFA's judgment, does not adequately reflect changes that a PACE-funded 
project may cause in the borrower's ability to repay financial 
obligations, especially in early periods after the project 
installation. For any financing, the ability of a homeowner to repay 
clearly is an established approach that has been found to be the most 
appropriate safeguard. Further discussion relating to SIR is presented 
below in Section IV.A.3.
3. Underwriting Standards for PACE Programs
    Many comments favorable to PACE programs asserted that the 
existence of appropriate underwriting guidance or guidelines for PACE 
programs would serve to protect homeowners and lenders, reducing the 
risk of default or loss. Three primary documents were referenced--the 
Council on Environmental Quality: Middle Class Task Force ``Recovery 
Through Retrofit'' (October 2009) [CEQ]; the Department of Energy, 
Guidelines for Pilot PACE Financing Programs (May 7, 2010) [DOE 
Guidelines]; and, H.R. 2599, the PACE

[[Page 36102]]

Assessment Protection Act of 2011 [H.R. 2559]. FHFA believes that these 
documents show that the underwriting standards PACE advocates propose 
are complex, incomplete, and impractical to implement, and that they 
would not adequately protect mortgage holders such as the Enterprises 
from financial risk.
    For example, H.R. 2599 includes dozens of sections and subsections 
purporting to create standards for acceptable PACE projects, many of 
which involve complex calculations based on unstated assumptions and 
unspecified methodologies. One of the principal standards that H.R. 
2599 would impose is that ``The total energy and water cost savings 
realized by the property owner and the property owner's successors 
during the useful lives of the improvements, as determined by [a 
mandatory] audit or feasibility study, * * * are expected to exceed the 
total cost to the property owner and the property owner's successors of 
the PACE assessment.'' But no methodology for actually computing the 
costs and savings is provided.
    Such calculations would not, in FHFA's judgment, be simple or 
straightforward. As with any calculation of financial effects over 
time, simply summing up projected nominal costs and benefits without 
discounting to reflect the timing of their realization would be 
improper--a dollar of incremental income realized at a point some years 
in the future does not completely offset a dollar of incremental cost 
incurred today. For that reason, assumptions as to applicable discounts 
rates are significant and could be determinative--especially given that 
it may take a period of several years for benefits to exceed costs. 
Given the uncertainty associated with important elements of calculating 
the costs and benefits of PACE-funded projects (such as uncertainty as 
to the course of future energy prices, the costs of maintaining and 
repairing equipment, and the pace of advances in energy-efficiency 
technology), an effective standard incorporating financial metrics must 
be based on reasonable and accepted financial methodologies for 
computing those metrics. In FHFA's judgment, neither H.R. 2599 nor any 
of the comments suggesting that FHFA adopt its substance provided 
sufficient guidance concerning the appropriate discount rates or rates 
to be applied in the calculation (or suggested a sufficient methodology 
for determining such rates).
    In addition, H.R. 2599 proposed that standards should deny loans to 
homeowners where property taxes are not current, where recent 
bankruptcy filings have occurred, or where the homeowner is not current 
on all mortgage debt. This definition of the ability-to-repay is not 
that of normal credit extension, but a reflection of the standard 
already employed by certain PACE programs. In FHFA's judgment, these 
criteria do not adequately address the significant ability-to-repay 
element of normal credit underwriting, a critical element cited in the 
2010 Dodd Frank Wall Street Reform and Consumer Protection Act. 
Moreover, H.R. 2599 permits PACE loans to include expenses of 
homeowners such as undertaking mandated energy audits; this, in 
addition to administrative fees of up to ten percent of the loan 
amount, further lowers the amount of the energy improvement that may be 
purchased or requires a higher PACE loan, adding more exposure of 
lenders to financial risks in a subsequent sale of the property. 
Finally, H.R. 2599 endorses a cap of ten percent of the estimated value 
of the property, which (in the absence of a complementary ability-to-
repay standard) is collateral based lending. The subprime crisis of 
recent has demonstrated such lending to present different, and in 
FHFA's judgment, greater risks than lending based on ability to repay 
supplemented by the protection of adequate collateral.
    Similarly, the DOE Guidelines (attached to DOE's submission and 
referenced by numerous commenters) set forth a formula for computing 
the Savings-to-Investment Ratio (SIR), and suggest that PACE programs 
should adopt an underwriting standard that SIR be ``greater than one.'' 
DOE's definition of SIR incorporates an ``appropriate discount rate,'' 
but offers no guidance for determining what such a rate would be.\20\ 
Moreover, DOE's definition of SIR permits ``quantifiable environmental 
and health benefits that can be monetized'' to be treated as 
``savings'' for purposes of the calculation. The Guidelines do not 
define ``quantifiable environmental and health benefits that can be 
monetized,'' nor do they explain whether such benefits must have a 
real, rather than a potential or theoretical, effect on the borrower's 
actual cash-flows in order to be factored into the calculation. 
Accordingly, FHFA perceives uncertainty as to whether even those PACE 
projects that meet the DOE-recommended standard of SIR greater than one 
can reliably be expected to have an actual, positive effect on the 
borrower's net cash flow. The DOE Guidelines also specify that ``SIR 
should be calculated for [an] entire package of investments, not 
individual measures.'' \21\ The Guidelines thereby suggest that 
projects with a SIR of less than one would nevertheless be eligible for 
PACE funding if they were ``package[d]'' with other projects at the 
same property that have a SIR sufficiently greater than one. Id. In 
FHFA's view, this undermines the utility of SIR as an underwriting 
criterion.
---------------------------------------------------------------------------

    \20\ The formula is ``SIR = [Estimated savings over the life of 
the assessment, discounted back to present value using an 
appropriate discount rate] divided by [Amount financed through PACE 
assessment].'' DOE Guidelines (May 7, 2010) at 2.
    \21\ DOE Guidelines at 3.
---------------------------------------------------------------------------

    Without a reasonable, reliable, and consistent methodology for 
making the calculations that purport to determine whether proposed 
projects are financially sound (including a reasonable and reliable 
method for determining the applicable metrics and discount rate), a 
standard based on the purported financial soundness of PACE-funded 
projects would not, in FHFA's judgment, adequately protect the 
Enterprises from financial risk.
    The DOE Guidelines illustrate other underwriting issues of concern 
to FHFA. First, the document provides ``best practice guidelines'' 
only; they have no force of law and are not backed by any supervisory 
or enforcement mechanism. States and localities may choose to adopt 
some, all, or none of the guidelines. Accordingly, the DOE guidance 
itself does not propose uniform, national standards.
    Second, although the DOE Guidelines purport to incorporate 
``Property Owner Ability to Pay'' into their ``Underwriting Best 
Practices,'' FHFA is concerned that the suggested practices almost 
entirely disregard ability-to-repay as a meaningful criterion. The only 
three ``precautions'' the DOE Guidelines recommend as a means of 
ensuring ``ability to pay'' are (1) ``[SIR] greater than one,'' (2) 
``Property owner is current on property taxes and has not been late 
more than once in the past 3 years, or since the purchase of the house 
if less than three years,'' and (3) ``Property owner has not filed for 
or declared bankruptcy for seven years.'' DOE Guidelines at 6-7. As 
explained above, the DOE SIR calculation depends upon unstated 
assumptions, implements an unspecified methodology, and may treat items 
that have no actual effect on cash-flow as if they were real cash 
savings. Given the uncertainty that even PACE-funded projects with SIR 
greater than one will be cash-flow positive immediately upon 
implementation, or even for years thereafter, FHFA is

[[Page 36103]]

concerned that the DOE SIR criterion may not adequately reflect the 
immediate, real-world consequences of PACE-funded projects on 
borrowers' ability to repay their financial obligations, including 
their mortgage loans. To the same effect, while being current on 
property taxes and having a clean bankruptcy history provide some 
limited evidence of a borrower's ability to pay, FHFA is concerned that 
they are not sufficient to adequately protect mortgage holders from 
material increases in financial risk. As noted, many PACE commenters 
favorable to the program, while citing current ``standards, actually 
advocate additional standards be set forth by FHFA in any rulemaking. 
The omission by PACE advocates of such common credit metrics as debt-
to-income ratios and credit scores from their proposed underwriting 
standards suggests to FHFA that PACE programs are relying principally 
on the value of the collateral and their prime lien position, rather 
than on the borrower's ability to service its debt obligations out of 
income, as assurance of repayment. In FHFA's judgment, this reflects 
collateral-based lending that could tend to increase the financial risk 
borne by subordinate creditors such as mortgage holders. Indeed, the 
promotional materials for Boulder County, Colorado's PACE program state 
that ``You may be a good candidate for a ClimateSmart Loan Program loan 
if you: Are not likely to qualify for a lower-interest loan through a 
private lender (e.g. home equity loan) due to less-than-excellent 
credit. * * *'' \22\
---------------------------------------------------------------------------

    \22\ ClimateSmart Loan Program Eligibility FAQs, available at 
https://climatesmartloanprogram.org/eligibility.htm (last visited 
June 2, 2012).
---------------------------------------------------------------------------

    Third, the DOE Guidelines specify that ``Estimated property value 
should be in excess of property owner's public and private debt on the 
property, including mortgages, home equity lines of credit (HELOCs), 
and the addition of the PACE assessment, to ensure that property owners 
have sufficient equity to support the PACE assessment.'' \23\ This 
appears to permit the imposition of PACE liens that would leave the 
property owner with only nominal equity in the property. As recent 
experience has shown, circumstances in which homeowners have little or 
no equity in the property can be extremely risky for mortgage holders; 
FHFA does not believe that an underwriting criterion that allows a PACE 
project to reduce a homeowner's equity in the property to essentially 
zero provides adequate protection to mortgage holders.
---------------------------------------------------------------------------

    \23\ DOE Guidelines at 6.
---------------------------------------------------------------------------

    The Council on Environmental Quality (``CEQ'') document indicates 
that the first priority of the CEQ was improving access for consumers 
to ``straightforward and reliable information on home energy retrofits 
* * *.'' CEQ then noted, ``Homeowners face high upfront costs and many 
are concerned that they will be prevented from recouping the value of 
their investment if they choose to sell their home. The upfront costs 
of home retrofit projects are often beyond the average homeowner's 
budget.'' The report then cites favorably municipal energy financing 
costs added to a property tax bill with ``payment generally lower than 
utility bill savings.'' This presupposes that such savings will be 
greater than increased property tax bills. But, of note, the CEQ 
continues and states ``Federal Departments and Agencies will work in 
partnership with state and local governments to establish standardized 
underwriting criteria and safeguards to protect consumers and minimize 
financial risks to the homeowners and mortgage lenders. Additionally, 
CEQ noted the need to ``* * * advance a standard home energy 
performance measure and more uniform underwriting procedures; develop 
procedures for more accurate home energy appraisals; and streamline the 
energy audit process.'' FHFA is unaware that any of these conditions 
attendant to the CEQ endorsement of municipal financing programs has 
been met. Regarding PACE, the report notes that ``DOE will be funding 
model PACE projects, which will incorporate the new principles for PACE 
program design * * * [and this f]unding will encourage pilots of PACE 
programs, with more developed homeowner and lender protections than 
have been provided to date.'' Again, the pilot and model projects, that 
do not impose risk on lenders, have not been developed, nor have the 
protections that were called for by CEQ been addressed.
    Many commenters suggested that FHFA promulgate underwriting 
standards. In FHFA's judgment, such comments confirm the current 
absence of adequate consumer protection, program and contract 
requirements, energy product, contractor qualifications and performance 
requirements and the absence of uniformity of such standards and of an 
enforcement or compliance mechanisms. In FHFA's judgment, these 
circumstances would cause first-lien PACE programs to pose significant 
financial risk to the Enterprises. Mortgage products lacking in 
metrics, market performance and safeguards are routinely rejected for 
purchase by the Enterprises. Even the majority of PACE supporters 
endorse additional homeowner protections.
    Moreover, FHFA considers such suggestions impractical for several 
reasons. First, FHFA notes the absence of many of the proposed 
standards, which commenters suggest could be developed by other 
regulators or standard-setting organizations. Many of the comments 
propose varying standards on a wide variety of subjects outside FHFA's 
field of expertise. For example the DOE Guidelines--which many 
commenters advocate FHFA should adopt--propose that PACE programs 
``limit eligibility [for funding] to those measures with well-
documented energy and dollar savings for a given climate zone.'' \24\ 
However, FHFA as a financial institution regulator is not in a position 
to evaluate and reevaluate whether a given type of retrofit will 
consistently produce cost savings ``for a given climate zone,'' 
particularly in light of the fact that PACE programs have proliferated 
across the country. Moreover, as many commenters acknowledge, there is 
insufficient data to support reliable conclusions about the valuation 
and cash-flow effects of energy-retrofit projects. See, e.g., comments 
of the Joint Trade Associations (``disclosures about future utility 
costs are conjecture and are unreliable''); National Association of 
Realtors (``it is difficult to measure the benefits of these 
improvements because the way an owner uses energy in a home may change 
over time, depending on variables such as weather and family 
composition and whether or not the energy efficiency retrofit has 
become technologically outdated, or was ever as efficient as it was 
supposed to be''). In the absence of such data FHFA would be challenged 
to formulate standards that will reliably protect the safety and 
soundness of the Enterprises' mortgage asset portfolios. Second, FHFA 
believes that many of the metrics underlying proposed standards depend 
upon assumptions and are of unproven reliability. For example, many 
commenters propose standards relating to the cash-flow effects of 
projects, but they do not provide a reliable methodology for projecting 
the determinants of such effects, such as future energy prices and 
homeowner behavioral changes. Third, FHFA does not establish standards 
for PACE programs. FHFA regulates the Enterprises and the Federal Home 
Loan Banks; PACE programs are established

[[Page 36104]]

with few standards and these are left to localities, in most cases, 
either to create or to enlarge. Fourth, FHFA believes that even if such 
standards could be devised, implemented, and applied, mortgage holders 
such as the Enterprises would still bear significant financial risk 
associated with future contingencies such as unexpected movements in 
energy prices, advances in energy-efficiency technology, and changes in 
the aesthetic and practical preferences of potential homebuyers.
---------------------------------------------------------------------------

    \24\ DOE Guidelines at 3.
---------------------------------------------------------------------------

4. Empirical Data Relating to Financial Risk
    Many comments provide their own findings or conclusions about PACE, 
but without adequate data or support. The support that is provided in 
many cases is of a general nature addressing the benefits of energy 
retrofitting and energy savings. However, there was often no causal 
link established between the purported savings and the use of PACE as a 
financing vehicle. Most studies presented are estimations, not reports 
of actual findings.
    As with any product or program brought to the Enterprises, 
proponents offer product descriptions, including safeguards, financing 
features, target markets, risk management procedures, prior experience 
in managing projects, test marketing or pilot programs, return on 
capital and profitability metrics and other details. Comment letters 
reflected an absence of such information even three years after the 
promulgation of PACE statutes. Commenters provided no data on the 
resale performance of PACE properties, and the sample size of the data 
repeatedly cited is likely too small to draw reliable conclusions in 
any event. Moreover, an analysis of resales in one area of the country 
may not reliably indicate resale performance in another area, since 
customer acceptance may vary greatly depending upon the penetration 
rate of solar or other types of retrofit projects within an area. The 
absence of such data would normally be a basis for rejection of a 
product or program by the Enterprises.
    Many commenters pointed to high-level summaries of default data 
relating to PACE programs as support for their contention that PACE 
programs do not materially increase the risk borne by mortgage holders. 
FHFA finds the summaries of default data proffered in the comments 
generally unhelpful. As an initial matter, underlying data and 
definitions generally were not provided, leaving FHFA unable to 
determine such basic matters as whether the referenced ``defaults'' 
refer to non-payment of PACE assessments, other property tax 
obligations, or mortgage obligations. Nor is it apparent what criteria 
were used to define a default, e.g., whether default requires a 30-day 
delinquency, a 90-day delinquency, some fixed number of missed 
payments, some fixed or relative amount of non-payment, or other 
indicia of default.
    Moreover, serious methodological problems permeate the analysis of 
default data reflected in the comments. For example, the sample size 
was very small, with only a small number of defaults among the PACE 
homes during the limited term period, rendering the statistical 
reliability of the analysis doubtful. Further, PACE homes were likely 
subject to certain additional underwriting requirements, skewing the 
comparison, yet the summary presentations provided in the comments 
generally did not address this issue. It is likely that the PACE 
borrowers had a lower risk profile than the non-PACE borrowers, and 
that the projected energy savings did not factor materially into the 
lower default rate. PACE loans are also relatively new, so they have 
not been as affected by the economic downturn as the more seasoned non-
PACE loans. A robust analysis would have matched the PACE sample to a 
group of non-PACE homes in the area having a similar set of risk 
attributes (e.g. LTV ratio, credit score, DTI ratio, product type, loan 
age, home value, borrower income, etc.). In the absence of such an 
analysis, FHFA cannot agree that the default experience of PACE 
jurisdictions provides sufficient support to the views of PACE 
supporters.
    Most supporters of PACE that addressed default rates cited data 
provided by Sonoma County and the cities of Boulder and Palm Desert. 
PACE supporters have previously noted that these programs probably are 
not representative. For example, in a March 15, 2010 letter, PACENow 
acknowledged that ``early PACE programs that were launched in 2008 and 
2009--Berkeley, Boulder, Palm Desert, and Sonoma--were extremely small 
and all in fairly wealthy communities.'' \25\ In its comment 
submission, Sonoma County, California makes a similar point: ``[I]t has 
been Sonoma's experience that delinquency and default rates on 
properties with PACE mortgages are extremely low, possibly reflecting a 
self-selecting group of participants * * * .'' Similarly, the Town of 
Babylon, NY noted in its submission that ``FHFA has, in its 1/26/12 
request for comment, sought very exacting data on the operational 
soundness of PACE programs. Credible results can only be forthcoming 
from a wide, representative sample of programs that are all actually 
operating within a set of uniform parameters.''
---------------------------------------------------------------------------

    \25\ Available at https://pacenow.org/documents/PACE%20Concerns%20and%20White%20House%20Solutions.pdf (last visited 
June 11, 2012).
---------------------------------------------------------------------------

    The Town of Babylon comment is a clear assertion, with which FHFA 
concurs, that credible information does not exist. FHFA would differ in 
a conclusion, however, that deploying an unfettered array of programs 
that would impact potentially billions of dollars in existing home 
mortgages, and do so without uniform parameters and metrics is a method 
for securing such information.
    FHFA believes that such comments cast doubt upon PACE advocates' 
assertions that first-lien PACE programs pose only ``minimal'' or 
``immaterial'' risk to mortgage holders such as the Enterprises.
    PACE program endorsements by certain federal agencies have been 
limited to calls for pilots, development of underwriting standards, 
production of metrics and creating no harm to homeowners or lenders. 
However, no document produced by PACE commenters or by any government 
agency has provided a fully specified plan for an actual pilot program. 
FHFA notes that programs such as Sonoma County's Energy Independence 
Program are continuing to fund energy-retrofit programs for homeowners 
that meet their underwriting guidelines. FHFA believes that these and 
other programs may create a track record of data that may permit 
further analysis of the energy and financial effects of PACE-funded 
projects.

B. PACE Programs and the Market for Financing Energy-Related Home-
Improvement Projects

    As noted above, many commenters asserted that PACE programs 
overcome barriers to financing energy-related home improvement 
projects. In FHFA's judgment, some of the barriers PACE programs 
purport to overcome actually reflect reasonable credit standards that 
operate to protect both homeowners and mortgage holders from financial 
risk. It is also FHFA's judgment, PACE is unlikely to overcome other of 
the purported barriers. Finally, FHFA notes that the U.S. Department of 
Energy, which is generally supportive of PACE programs, has identified 
factors other than available means of finance as inhibiting consumer 
acceptance of energy retrofit projects.
    Many commenters cited ``high upfront cost'' as a barrier that PACE 
purportedly overcomes. But PACE is not unique in this regard; any 
method of finance that allows repayment over time overcomes

[[Page 36105]]

the purported barrier of ``high up-front cost.'' Further, PACE program 
designs include up to a ten percent administrative fee for counties and 
financing of audit and inspections that represent very high up-front 
charges and reduce the amount of retrofit purchase by a homeowner. 
Accordingly, FHFA believes that in many instances, the more relevant 
barrier for homeowners is a lack of credible information, as noted by 
government entities as their first concern and, for those who wish to 
finance energy-efficiency retrofit projects, is poor credit or lack of 
demonstrable ability to repay the obligation. Several PACE programs 
have made public statements suggesting that they might appeal to 
borrowers with substandard credit. For example, as of May 2012, Sonoma 
County California's ``SCEIP'' program noted, in a presentation that it 
required potential borrowers to view, that ``No credit check [is] 
required'' and ``no income qualifications'' are applied.\26\ Similarly, 
Boulder, Colorado has marketed its ``ClimateSmart'' PACE program in 
terms that appear to invite applicants with substandard credit: ``You 
may be a good candidate for a ClimateSmart Loan Program loan if you: 
Are not likely to qualify for a lower-interest loan through a private 
lender (e.g. home equity loan) due to less-than-excellent credit * * 
*.'' \27\ In any event, lending to applicants with ``less-than-
excellent credit'' based on ``no credit check'' and ``no income 
qualifications'' amounts to collateral based lending, which the 
subprime crisis of the past several years has demonstrated to present 
different and, in FHFA's judgment, greater risks than lending based on 
ability to repay which may be supplemented by holding adequate 
collateral.
---------------------------------------------------------------------------

    \26\ SCEIP--Residential--Energy--Education Presentation at p. 6, 
available at https://www.sonomacountyenergy.org/apply-for-financing.php, ``Presentation'' link (last visited May 31, 2012).
    \27\ ClimateSmart Loan Program Eligibility FAQs, available at 
https://climatesmartloanprogram.org/eligibility.htm (last visited 
June 2, 2012).
---------------------------------------------------------------------------

    Relatedly, many commenters asserted that the relatively long 
payback periods associated with PACE-funded projects may present a 
barrier to homeowners who are not certain they will continue to reside 
at the property over the entire period. Some commenters referred to 
this as the ``split incentives'' problem. Commenters suggested that 
because PACE assessments ``run with the land,'' a successor purchaser 
would assume the obligation and the original borrower therefore need 
not be concerned about making a large upfront investment. FHFA believes 
that this economic reasoning is flawed. A successor purchaser of a 
property will consider the value of the PACE project and the amount of 
the PACE obligation he or she will assume in determining the purchase 
price. SchoolsFirst Federal Credit Union, which gave qualified support 
to PACE programs in the abstract, explained in its comment that 
``subsequent purchasers may reduce the amount they would pay to 
purchase the property by the amount of the outstanding PACE 
obligation.'' The Credit Union stated that this is most likely to be 
the case where ``the subsequent purchaser could not obtain attractive 
financing * * *, [and t]he purchaser is likely to request an offset.'' 
In FHFA's judgment, that is correct--the proceeds the initial borrower 
will realize upon a sale of the property will reflect expectations 
about the future financial consequences of the PACE project. In effect, 
the buyer will require the seller to pay off some or all of the PACE 
obligation--either directly or by accepting a commensurately lower 
price--in exchange for the then-present value of the PACE project. For 
that reason, PACE financing should not, in FHFA's view, materially 
change the incentives of homeowners who may not expect to reside in the 
same property over the entire life of a PACE-financed project and the 
corresponding financial obligation.
    The Department of Energy's publicly available Request for 
Information regarding the development of national energy ratings for 
home retrofits indicates that financing is not the only impediment to 
energy retrofits.\28\ The DOE RFI notes that its goal was to ``* * 
*establish a rating program that could be broadly applied to existing 
homes and provide reliable information at a low cost to consumers.'' As 
the Department noted, ``Lack of access to credible, reliable 
information on home energy performance and cost effective improvement 
opportunities limit consumers from undertaking home energy retrofits.'' 
Even energy audits could be improved to provide information to 
consumers on what improvements were desirable. As the DOE RFI noted, 
``Energy audits and assessment can provide useful information on the 
extent of energy savings possible from home improvements and 
recommendations for the types of improvement to make that are cost-
effective* * * While recommendations for improvements are useful, there 
is not currently a standardized approach to providing and prioritizing 
these recommendations.'' Thus, consumer information based on uniform 
base data has not been available, leaving localities, utilities, 
auditors, inspectors and building contractors to provide advice, with 
various capacities and perspectives to provide such advice.
---------------------------------------------------------------------------

    \28\ Department of Energy, Energy Efficiency and Renewable 
Energy, National Energy Rating Program for Homes, Request for 
Information (June 8, 2010), available at https://apps1.eere.energy.gov/buildings/publications/pdfs/corporate/rating_rfi_6_2_10.pdf.
---------------------------------------------------------------------------

C. Legal Attributes of PACE Assessments

    FHFA believes that the legal attributes of PACE programs are 
immaterial to the exercise of its supervisory judgment because FHFA's 
views as to the incremental financial risk first-lien PACE programs 
pose to the Enterprises does not depend upon a conclusion that PACE 
obligations are, in a legal sense, loans, tax assessments, or some 
hybrid of the two. Neither FHFA's existing directives relating to PACE 
nor the Proposed Rule nor any of the Alternatives challenge the legal 
authority of states and localities to implement first-lien PACE 
programs if they wish. Rather, FHFA is exercising its statutory mandate 
to protect the safety and soundness of the Enterprises by directing 
that they not purchase assets that create unacceptable incremental 
financial risk. The ability of other market participants such as banks, 
securities firms, independent investors and others to buy and hold or 
to buy and repackage for sale such loans is in no way affected. Indeed, 
FHFA made clear that PACE programs with liens accruing when recorded, 
as is the case for four states, would not run contrary to the FHFA 
position.
    However, FHFA believes the commenters overlook important 
differences between PACE assessments and other, more traditional 
assessments. Most significantly, PACE assessments are voluntary 
obligations created in the course of a commercial transaction involving 
a single property. In that regard, they differ from more typical 
property-tax assessments, such as special assessments for sidewalks or 
other community-wide improvements that individual property owners 
generally cannot opt into or out of. As PACE advocate and commenter 
Renewable Funding explained in a prior, publicly available statement, 
under PACE programs, ``willing and interested property owners 
voluntarily elect to receive funding and have assessments made against 
their property. * * * This opt-in feature does not typically appear in 
local government

[[Page 36106]]

improvement financing authority.'' \29\ Accordingly, as PACE gained 
public attention, many states began ``pursuing enabling legislation,'' 
as one PACE advocate stated in a September 2009 report.\30\ Commenters 
typically did not explain why new ``enabling legislation'' was 
necessary if PACE programs merely made use of pre-existing powers. As 
Fannie Mae explained in its comments, the voluntary or ``opt-in'' 
attribute is material to the risk borne by the mortgage holder and to 
the mortgage holder's ability to protect against such risk. ``Real 
estate taxes are known and accounted for at the time of mortgage 
origination. As a result, a mortgage lender can factor the tax payment 
into its underwriting analysis of the borrower's ability to repay the 
loan. * * * In contrast, PACE loans may be originated at any point 
during the term of a mortgage loan without the knowledge of the current 
servicer or investor, making escrowing for PACE loans practically 
impossible.''
---------------------------------------------------------------------------

    \29\ Property Assessed Clean Energy (PACE) Enabling Legislation 
(Mar. 18, 2010) at 2, available at https://pacenow.org/documents/PACE_enablinglegislation%203.18.10.pdf (last visited June 11, 
2012).
    \30\ Renewable and Appropriate Energy Laboratory at the 
University of California, Berkeley, Guide to Energy Efficiency & 
Renewable Energy Financing Districts (September 2009), available at 
https://rael.berkeley.edu/sites/default/files/old-site-files/berkeleysolar/HowTo.pdf, at p. 40.
---------------------------------------------------------------------------

    PACENow and other commenters cite a long-standing history of over 
37,000 assessment districts nationwide that function efficiently. In 
those special districts, the liens also have priority over the single-
family mortgage loans, and lenders have avoided additional losses. A 
voluntary assessment for a PACE project is different from a mandatory 
assessment for an essential service that cannot be easily purchased on 
an individual basis. Traditional assessments for water and sewer, 
sidewalks, street lighting, and other purposes add value to an entire 
community or special taxing district. A PACE assessment is simply an 
alternative means of financing energy improvements that is assumable. 
PACE ultimately does not change the consequences to the homeowner of 
purchasing a solar system in terms of the ability to recover the 
expended funds at resale. Unlike a home equity loan or leasing (which 
may also offer lower costs of financing), a PACE assessment shifts the 
risk to the lender in the event of default because of the lien-priming 
feature. A future buyer may prefer a home without the added assessment, 
despite any projected energy savings. While some buyers may be incented 
by the prospect of new technology, contributing to energy efficiency, 
and energy savings, other buyers may be disincented for a number of 
other reasons. Moreover, the rapid proliferation of PACE programs 
distinguishes the magnitude of the risks they pose to the Enterprises 
from that of the risks that may be associated with smaller, isolated 
assessment-based financing programs that PACE proponents assert involve 
similar voluntary transactions, such as programs for seismic upgrades 
in California or septic upgrades in Massachusetts, Virginia, and 
Michigan.

D. Public Policy Implications of PACE Programs

1. Environmental Implications of PACE Programs
    As described above, many commenters cited possible environmental 
benefits of PACE programs. As a general matter, FHFA supports programs 
and financing mechanisms designed to encourage energy-efficient home 
improvements, as well as other environmentally-friendly initiatives. 
See, e.g., Fannie Mae Selling Guide, Section B5-3.2-01 HomeStyle 
Renovation Mortgage: Lender Eligibility (May 15, 2012).\31\ However, as 
some of the comments acknowledge, any environmental effects of an 
energy-efficiency retrofit flow from the retrofit itself, not from the 
method by which that retrofit is financed. See, e.g., Decent Energy 
Inc. (``The environmental impact of the same set of energy efficiency 
measures should be identical without regard to financing mechanism.''); 
Joint Trade Association (``The environment does not react to the 
financing methods people elect.''). In other words, if a given retrofit 
is going to benefit the environment, it will produce the same benefit 
if funded by a PACE program or a traditional home equity loan. To the 
extent the commenters assert or suggest that PACE programs will result 
in retrofits that would not otherwise have been undertaken, thus 
creating a net increase in the number of retrofits and a net benefit to 
the environment, the comments have failed to demonstrate that PACE 
programs would cause such a net increase in energy-efficiency 
retrofits. Even if such a net increase were established, it would come 
at the expense of subordinating the financial interests of the 
Enterprises, lenders and holders of mortgage backed securities. See 
Joint Trade Association (noting that PACE programs ``may well cause 
more energy retrofits to be made, but it will also increase the risk 
and severity of defaults''). Accordingly, absent more information, FHFA 
cannot elevate purported environmental benefits over the financial 
interests of the Enterprises, which FHFA is statutorily bound to 
protect.
---------------------------------------------------------------------------

    \31\ Available at https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel051512.pdf.
---------------------------------------------------------------------------

2. Implications of PACE Programs on Energy Security and Independence
    As described above, many commenters cited energy security and 
independence as possible benefits of PACE programs. Though FHFA 
recognizes the importance of energy security and independence, FHFA 
also recognizes--as with any purported environmental benefits--that 
such a benefit flows (if at all) from the retrofit itself, not from the 
method by which that retrofit is financed. To the extent the comments 
assert or suggest that PACE programs will result in retrofits that 
would not otherwise have been undertaken, thus creating a net increase 
achieving energy security and independence, these comments fail to 
demonstrate that PACE programs would cause such a net increase in 
energy-efficiency retrofits. Even if such a net increase were 
established, it would come at the expense of subordinating the 
financial interests of the Enterprises. Accordingly, absent more 
information, FHFA cannot override the financial interests of the 
Enterprises, which FHFA is statutorily bound to protect, with purported 
environmental benefits.
3. Macroeconomic Implications and Effects of PACE Programs
    As described above, many commenters assert that PACE programs will 
have macro-economic benefits, such as increasing the amount of ``green 
jobs'' in the United States. Placer County estimated that the 
suspension of its PACE program prevented the creation of 326 jobs and 
saving 36 billion BTU per year. Placer County contends that it complies 
with all applicable consumer protection laws for home improvement 
financing, including 3-day rescission rights and the PACE program 
requires energy efficiency training to help achieve maximum energy 
reductions.
    Many comments cited a study that purported to conclude that PACE 
would facilitate an economic gain of $61,000 per home, and that $4 
million in PACE spending will generate, on average, $10 million in 
gross economic output, $1 million in tax revenue, and 60 jobs. See, 
e.g., Renewable Funding LLC 9. FHFA has concluded that these assertions 
are neither supported nor relevant.
    First, the study simply attributes to PACE programs all of the 
economic

[[Page 36107]]

activity related to PACE projects, but it does not examine how the 
economic resources employed in those projects would have been deployed 
in the absence of PACE programs. Accordingly, the study does not even 
purport to measure the incremental economic activity associated with 
PACE programs, which would be necessary if net economic effects were to 
be determined. True economic gains are more likely when energy 
improvements have short payback periods and appropriate reflect the 
existence and possible reduction or removal of government subsidies.
    Additionally, the model used to estimate the jobs, taxes, and flow-
through into the economy of PACE improvements contained a number of 
assumptions (50/50 split for solar/other energy efficiency projects, 
certain geographic localities, etc.), and sought to measure the 
economic impacts in a very broad way:
     Direct impacts (labor/materials for projects, taxes from 
installations including payroll taxes and income taxes on employees),
     Indirect impacts (supply-chain impacts since the direct 
purchase activity results in the purchase of goods/services from other 
businesses), and
     Induced impacts (the multiplier effect from the 
consumption expenses of those who enjoy income from the direct and 
indirect activities).
    The study did not look at whether solar is economically cost 
effective compared to other sources of energy. Despite the rapid fall 
in the price for solar panels since 2008 (due to lower raw material 
costs, large-scale production in Asia, and excess supply), solar is 
still more expensive than electricity produced from coal, oil, natural 
gas, nuclear, or wind. See, e.g., Citizens Climate Lobby 43 
(acknowledging that the cost of solar ``is double to quadruple what 
most people pay for electricity from their utilities'').
    The study also did not take into account the substantial government 
subsidies for new solar installations. In order for solar to be 
affordable for homeowners, it requires tax breaks and other subsidies.
     The main federal subsidy covers 30 percent of the total 
solar installation costs.
     Other subsidies from the states and local governments can 
increase the total subsidy to more than 50 percent.

Whether government subsidies are appropriately considered in a 
calculation of economic costs and benefits is questionable. To the 
extent they are considered, it is important to recognize the risk that 
changes in the public policy and/or political environment could affect 
their continued availability.

V. Discussion of the Proposed Rule and Alternatives Being Considered

    In the ANPR, FHFA stated that its 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.'' In light 
of the factors discussed above, the Proposed Rule has been revised as 
reflected below. Pursuant to the preliminary injunction requiring APA 
rulemaking, FHFA is also considering a number of alternatives to 
mitigate the risks to the Enterprises resulting from the lien-priming 
feature of first-lien PACE programs. FHFA invites comments suggesting 
modifications to these alternatives or identification of other 
alternatives that FHFA has not considered, which would address FHFA's 
duty to ensure that the Enterprises operate in a safe and sound manner.

A. The Proposed Rule

    The Proposed Rule would provide for the following:
    1. The Enterprises shall immediately take such actions as are 
necessary to secure and/or preserve their right to make immediately due 
the full amount of any obligation secured by a mortgage that becomes, 
without the consent of the mortgage holder, subject to a first-lien 
PACE obligation. Such actions may include, to the extent necessary, 
interpreting or amending the Enterprises' Uniform Security Instruments.
    2. The Enterprises shall not purchase any mortgage that is subject 
to a first-lien PACE obligation.
    3. The Enterprises shall not consent to the imposition of a first-
lien PACE obligation on any mortgage.
    In light of the comments received in response to the ANPR and 
FHFA's responses to those comments, FHFA believes that the Proposed 
Rule is reasonable and necessary to limit, in the interest of safety 
and soundness, the financial risks that first-lien PACE programs would 
otherwise cause the Enterprises to bear.

B. Risk-Mitigation Alternatives

    FHFA is considering three alternative means of mitigating the 
financial risks that first-lien PACE programs would otherwise pose to 
the Enterprises. FHFA solicits comments supported by reliable data and 
rigorous analysis showing that any of these alternatives, or any other 
alternative to the Proposed Rule, would provide mortgage holders with 
equivalent protection from financial risk to that of the Proposed Rule, 
and could be implemented as readily and enforced as reliably as the 
Proposed Rule.
1. First Risk-Mitigation Alternative--Guarantee/Insurance
    The first such Risk-Mitigation Alternative is as follows:
    a. The Enterprises shall immediately take such as actions as are 
necessary to secure and/or preserve their right to make immediately due 
the full amount of any obligation secured by a mortgage that becomes, 
without the consent of the mortgage holder, subject to a first-lien 
PACE obligation. Such actions may include, to the extent necessary, 
interpreting or amending the Enterprises' Uniform Security Instruments.
    b. The Enterprises shall not purchase any mortgage that is subject 
to a first-lien PACE obligation, except to the extent that the 
Enterprise, if it already owned the mortgage, would consent to the PACE 
obligation pursuant to paragraph (c) below.
    c. The Enterprises shall not consent to first-lien PACE obligations 
except those that (a) are (or promptly upon their creation will be) 
recorded in the relevant jurisdiction's public land-title records, and 
(b) meet any of the following three conditions:
    i. Repayment of the PACE obligation is irrevocably guaranteed by a 
qualified insurer,\32\ with the guarantee obligation triggered by any 
foreclosure or other similar default resolution involving transfer of 
the collateral property; or
---------------------------------------------------------------------------

    \32\ The Enterprises shall determine reasonable criteria by 
which ``qualified insurers'' can be identified.
---------------------------------------------------------------------------

    ii. A qualified insurer insures the Enterprises against 100% of any 
net loss attributable to the PACE obligation in the event of a 
foreclosure or other similar default resolution involving transfer of 
the collateral property; \33\ or,
---------------------------------------------------------------------------

    \33\ Net loss attributable to the PACE obligation shall be the 
greater of (a) the amount of the outstanding PACE obligation minus 
any incremental value (which could be positive or negative) that the 
PACE-funded project contributes to the collateral property, as 
determined by a current qualified appraisal, or (b) zero.
---------------------------------------------------------------------------

    iii. The PACE program itself provides, via a sufficient reserve 
fund maintained for the benefit of holders of mortgage interests on 
properties subject to senior obligation under the program,\34\

[[Page 36108]]

substantially the same coverage described in paragraph (ii) above.
---------------------------------------------------------------------------

    \34\ A ``sufficient reserve fund'' shall be a reserve fund that 
provides, on an actuarially sound basis, protection at least 
equivalent to that of a qualified insurer.
---------------------------------------------------------------------------

    In providing such consent, the Enterprises shall reserve the rights 
to revoke the consent in the event the subject PACE obligation ceases 
to meet any of the conditions, and to accelerate the full amount of the 
corresponding mortgage obligation so as to be immediately due in that 
event.
    FHFA has reservations about the First Risk-Mitigation Alternative, 
including whether the referenced guarantees and/or insurance would be 
available in the marketplace. Moreover, even to the extent the 
referenced guarantees and/or insurance were available in the 
marketplace, the First Risk Mitigation Alternative might not 
effectively insulate the Enterprises from the range of material 
financial risks that first-lien PACE programs otherwise would force 
them to bear. For example, the Enterprises would be exposed to the risk 
that the insurance provider may fail, potentially leaving the 
Enterprises to bear the very risks they were to be insured against. 
While an appropriate definition of ``qualified insurer'' can reduce 
this risk, it cannot eliminate it.
    Notwithstanding these reservations, and pursuant to the Preliminary 
Injunction, FHFA is considering the First Risk-Mitigation Alternative, 
and solicits comments regarding its potential benefits, detriments, and 
effects, as well as modifications that could make it more beneficial 
and effective or otherwise address FHFA's reservations.
2. Second Risk-Mitigation Alternative-- Protective Standards
    The second Risk-Mitigation Alternative is as follows:
    a. The Enterprises shall take such actions as are necessary to 
secure and/or preserve their right to accelerate so as to be 
immediately due the full amount of any obligation secured by a mortgage 
that becomes, without the consent of the mortgage holder, subject to a 
first-lien PACE obligation. Such actions may include, to the extent 
necessary, interpreting or amending the Enterprises' Uniform Security 
Instruments.
    b. The Enterprises shall not purchase any mortgage that is subject 
to a first-lien PACE obligation, except to the extent that the 
Enterprise, if it already owned the mortgage, would consent to the PACE 
obligation pursuant to paragraph (c) below.
    c. The Enterprises shall not consent to first-lien PACE obligations 
except in instances where, based on the Enterprise's underwriting 
definitions, the following five conditions are met--
    i. The PACE obligation is no greater than $25,000 or 10% of the 
fair market value of the underlying property, whichever is lower;
    ii. Current combined loan-to-value ratio (reflecting all 
obligations secured by the underlying property, including the putative 
PACE obligation, and based on a current qualified appraisal \35\) would 
be no greater than 65%; and
---------------------------------------------------------------------------

    \35\ A ``current, qualified appraisal'' shall be an appraisal 
that is (1) no more than 30 days old, and (2) in compliance with the 
Enterprises' published appraisal standards.
---------------------------------------------------------------------------

    iii. The borrower's adequately documented back-end debt-to-income 
ratio (including service of the putative PACE obligation) would be no 
greater than 35% using the calculation methodology provided in the 
Enterprises' guides;
    iv. The borrower's FICO credit score is not lower than 720; and
    v. The PACE obligation is (or promptly upon its creation will be) 
recorded in the relevant jurisdiction's public land-title records.
    d. The Enterprises are to treat a home-purchaser's prepayment of an 
existing first-lien PACE obligation as an element of the purchase price 
in determining loan amounts and applying underwriting criteria.
    FHFA has reservations about the Second Risk-Mitigation Alternative, 
including whether it would reduce but not eliminate the material 
financial risks that first-lien PACE programs would otherwise pose to 
the Enterprises. In particular, because the mechanism by which the 
Second Risk-Mitigation Alternative would protect the Enterprises is the 
imposition of a substantial equity cushion as a prerequisite to consent 
to creation of a senior PACE lien, market conditions in which equity is 
substantially eroded (i.e., severe declines in home prices) would cause 
the risks associated with such liens and borne by the Enterprises to 
become even more material.
    Notwithstanding these reservations, and pursuant to the Preliminary 
Injunction, FHFA is considering the Second Risk-Mitigation Alternative, 
and solicits comments regarding its potential benefits, detriments, and 
effects, as well as modifications that could make it more beneficial 
and effective or otherwise address FHFA's reservations.
3. Third Risk-Mitigation Alternative--H.R. 2599 Underwriting Standards
    The third Risk-Mitigation Alternative would adopt the key 
underwriting standards set forth in H.R. 2599, which many commenters 
proffered as a reasonable source of standards FHFA could adopt, and is 
as follows:
    a. The Enterprises shall take such actions as are necessary to 
secure and/or preserve their right to make immediately due the full 
amount of any obligation secured by a mortgage that becomes, without 
the consent of the mortgage holder, subject to a first-lien PACE 
obligation. Such actions may include, to the extent necessary, 
interpreting or amending the Enterprises' Uniform Security Instruments.
    b. The Enterprises shall not purchase any mortgage that is subject 
to a first-lien PACE obligation, except to the extent that the 
Enterprise, if it already owned the mortgage, would consent to the PACE 
obligation pursuant to paragraph (c) below.
    c. The Enterprises shall not consent to first-lien PACE obligations 
except those that (a) are (or promptly upon their creation will be) 
recorded in the relevant jurisdiction's public land-title records, and 
(b) meet all of the following conditions--
    i. The PACE obligation is embodied in a written agreement 
expressing all material terms;
    ii. The agreement requires that, upon payment in full of the PACE 
obligation, the PACE program promptly provide written notice of 
satisfaction to the owner of the underlying property and the holder of 
any mortgage on such property as reflected in the relevant 
jurisdiction's land-title records and take all necessary steps to 
extinguish the PACE lien;
    iii. All property taxes and any other public assessments on the 
property are current and have been current for three years or the 
property owner's period of ownership, whichever period is shorter;
    iv. There are no involuntary liens, such as mechanics liens, on the 
property in excess of $1,000;
    v. No notices of default and not more than one instance of 
property-based debt delinquency have been recorded during the past 
three years or the property owner's period of ownership, whichever 
period is shorter;
    vi. The property owner has not filed for or declared bankruptcy in 
the previous seven years;
    vii. The property owner is current on all mortgage debt on the 
property;
    viii. The property owner or owners are the holders of record of the 
property;
    ix. The property title is not subject to power of attorney, 
easements, or subordination agreements restricting the authority of the 
property owner to subject the property to a PACE lien;
    x. The property meets any geographic eligibility requirements 
established by the PACE program;

[[Page 36109]]

    xi. The improvement funded by the PACE transaction has been the 
subject of an audit or feasibility study that:
    a. Has been commissioned by the local government, the PACE program, 
or the property-owner and completed no more than 90 days prior to 
presentation of the proposed PACE transaction to the mortgage holder 
for its consent; and
    b. Has been performed by a person who has been certified as a 
building analyst by the Building Performance Institute or as a Home 
Energy Rating System Rater by a Rating Provider accredited by the 
Residential Energy Service network; or who has obtained other similar 
independent certification; and
    c. Includes each of the following:
    1. Identification of recommended energy conservation, efficiency, 
and/or clean energy improvements;
    2. Identification of the proposed PACE-funded project as one of the 
recommended improvements identified pursuant to paragraph 1. supra;
    3. An estimate of the potential cost savings, useful life, benefit-
cost ratio, and simple payback or return on investment for each 
recommended improvement; and,
    4. An estimate of the estimated overall difference in annual energy 
costs with and without the recommended improvements;
    xii. The improvement funded by the PACE transaction has been 
determined by the local government as one expected to be affixed to the 
property for the entire useful life of the improvement based on the 
expected useful lives of energy conservation, efficiency, and clean 
energy measures approved by the Department of Energy;
    xiii. The improvement funded by the PACE transaction will be made 
or installed by a contractor or contractors determined by the local 
government to be qualified to make the PACE improvements;
    xiv. Disbursal of funds for the PACE transaction shall not be 
permitted unless:
    a. The property owner executes and submits to the PACE program a 
written document requesting such disbursement;
    b. The property owner submits to the PACE program a certificate of 
completion, certifying that improvements have been installed 
satisfactorily; and
    c. The property owner executes and submits to the PACE program 
adequate documentation of all costs to be financed and copies of any 
required permits;
    xv. The total energy and water cost savings realized by the 
property owner and the property owner's successors during the useful 
lives of the improvements, as determined by the audit or feasibility 
study performed pursuant to paragraph xi. supra are expected to exceed 
the total cost to the property owner and the property owner's 
successors of the PACE assessment;
    xvi. The total amount of PACE assessments for a property shall not 
exceed 10 percent of the estimated value of the property as determined 
by a current, qualified appraisal;
    xvii. As of the effective date of the PACE agreement, the property 
owner shall have equity in the property of not less than 15 percent of 
the estimated value of the property as determined by a current, 
qualified appraisal and calculated without consideration of the amount 
of the PACE assessment or the value of the PACE improvements;
    xviii. The maximum term of the PACE assessment shall be no longer 
than the shorter of a) 20 years from inception, or b) the weighted 
average expected useful life of the PACE improvement or improvements, 
with the expected useful lives in such calculations consistent with the 
expected useful lives of energy conservation and efficiency and clean 
energy measures approved by the Department of Energy.
    In providing such consent, the Enterprises are to reserve the 
rights to revoke the consent in the event the subject PACE obligation 
ceases to meet any of the conditions, and to accelerate so as to be 
immediately due the full amount of the corresponding mortgage 
obligation in that event.
    FHFA has reservations about the Third Risk-Mitigation Alternative, 
including whether it could practically be implemented by FHFA and the 
Enterprises given that certain elements of the alternative appear to be 
inherently vague and/or dependent upon assumptions that FHFA lacks a 
sound basis (and the requisite staff and resources) to provide or 
evaluate.
    For example, while the alternative would require that ``The total 
energy and water cost savings realized by the property owner and the 
property owner's successors during the useful lives of the 
improvements, as determined by [a mandatory] audit or feasibility study 
* * * are expected to exceed the total cost to the property owner and 
the property owner's successors of the PACE assessment,'' no 
methodology for computing the costs and savings is provided. 
Assumptions as to applicable discounts rates are significant and indeed 
can be determinative--especially since PACE-funded projects may be 
cash-flow negative for the first several years. Given the uncertainty 
associated with important elements of calculating the costs and 
benefits of PACE-funded projects (such as uncertainty as to the course 
of future energy prices, the costs of maintaining and repairing 
equipment, and the pace of advances in energy-efficiency technology), 
determining an appropriate discount rate is a non-trivial undertaking, 
and FHFA lacks a sound basis to provide one. Without a reasonable, 
reliable, and consistent methodology for making the calculations that 
purport to determine whether proposed projects are financially sound 
(including a reasonable and reliable method for determining the 
applicable discount rate or rates), the alternative would not 
adequately protect the Enterprises from financial risk. Similarly, 
while the maximum term of the PACE obligation is determined with 
reference to a ``weighted average expected useful life of the PACE 
improvement or improvements,'' neither H.R. 2599 nor any of the 
commenters explained how the weights are to be determined, and most 
appear to assume that ``expected useful lives of energy conservation 
and efficiency and clean energy measures approved by the Department of 
Energy'' will be available and reliable for all PACE-funded projects, 
which FHFA believes is uncertain. Indeed, in many respects, the 
deployment of pilot programs tied to determining energy efficiency, 
providing metrics of such efficiency, training appraisers and 
inspectors, establishing standards based on such pilot programs in the 
area of energy efficiency and consumer protections and then providing a 
source of reliable information to consumers would appear more 
productive than selecting among financing mechanisms at this time. 
Additionally, a clear method for enforcing standards set forth in such 
a program would be beneficial.
    Notwithstanding these reservations, and pursuant to the Preliminary 
Injunction, FHFA is considering the Third Risk-Mitigation Alternative, 
and solicits comments regarding its potential benefits, detriments, and 
effects, as well as modifications that could make it more beneficial 
and effective or otherwise address FHFA's reservations.

VI. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to the Office 
of Management and Budget for review.

[[Page 36110]]

VII. Regulatory Flexibility Act

    The proposed rule applies only to the Enterprises, which do not 
come within the meaning of small entities as defined in the Regulatory 
Flexibility Act (See 5 U.S.C. 601(6)). Therefore, in accordance with 
section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 605(b)), 
FHFA certifies that this proposed rule, if promulgated as a final rule, 
will not have a significant economic impact on a substantial number of 
small entities.

List of Subjects in 12 CFR Part 1254

    Government-sponsored enterprises, Housing, Lien-priming, Mortgages, 
Mortgage-backed securities, Property Assessed Clean Energy Programs.

    For the reasons stated in the preamble, and under the authority of 
12 U.S.C. 4526, the Federal Housing Finance Agency proposes to amend 
Chapter XII of Title 12 of the Code of Federal Regulations by adding a 
new part 1254 to subchapter C to read as follows:

PART 1254--ENTERPRISE UNDERWRITING STANDARDS

Sec.
1254.1 Definitions.
1254.2 Mortgage assets affected by first-lien Property Assessed 
Clean Energy (PACE) Programs.
1254.3 [Reserved]

    Authority:  12 U.S.C. 4526(a).


Sec.  1254.1  Definitions.

    As used in this part,
    Consent means to provide voluntary written assent to a proposed 
transaction in advance of the transaction, and includes the 
documentation embodying such assent.
    First-lien means having or taking a lien-priority interest ahead of 
or senior to a first mortgage on the same property, or otherwise 
subordinating the security interest of the holder of a first mortgage 
to that of another financial obligation secured by the property.
    PACE obligation shall mean a financial obligation created under a 
Property Assessed Clean Energy (PACE) Program or other similar program 
for financing energy-related home-improvement projects through 
voluntary and/or contractual assessments against the underlying 
property.


Sec.  1254.2  Mortgage assets affected by first-lien Property Assessed 
Clean Energy (PACE) Programs.

    (a) The Enterprises shall immediately take such as actions as are 
necessary to secure and/or preserve their right to make immediately due 
the full amount of any obligation secured by a mortgage that becomes, 
without the consent of the mortgage holder, subject to a first-lien 
PACE obligation. Such actions may include, to the extent necessary, 
interpreting or amending the Enterprises' Uniform Security Instruments.
    (b) The Enterprises shall not purchase any mortgage that is subject 
to a first-lien PACE obligation.
    (c) The Enterprises shall not consent to the imposition of a first-
lien PACE obligation on any mortgage.


Sec.  1254.3  [Reserved]

    Dated: June 12, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2012-14724 Filed 6-14-12; 8:45 am]
BILLING CODE 8070-01-P