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November 07, 2014  

Agencies Stop Opposing Clean-Energy Loans

The agency that governs Fannie Mae and Freddie Mac has quietly reversed its longstanding opposition to buying mortgages on homes with liens for clean-energy loans.

The Federal Housing Finance Agency has reached an agreement with several mid-size lenders that will allow Fannie and Freddie to buy mortgages on homes encumbered by liens booked under the property-assessed clean energy (PACE) program, so long as the mortgage lenders agree to repurchase any of the home loans that default. The FHFA, which declined to comment, has yet to officially adopt the policy.

Under the nationwide PACE program, residents and businesses can finance 100% of the cost of energy-saving items like upgraded insulation, solar panels and water-system improvements. Property owners repay the loans via special property-tax assessments that may be deductible from federal income taxes.

But those tax liens are the reason FHFA has until now made homes with PACE loans off-limits to Fannie and Freddie. PACE obligations enjoy first-lien status in most states, rendering municipalities first in line to be repaid — ahead of the mortgage agencies — in the event of mortgage default. Specifically, Fannie and Freddie have been refusing to buy mortgages that refinance homes with PACE liens or mortgages financing the purchase of homes with PACE loans taken out by previous homeowners.

One industry source said the FHFA “surprised a lot of people” by agreeing to allow purchases of mortgages on homes with PACE liens.

So far, 31 states have passed legislation enabling PACE financing, despite the fact that FHFA’s longstanding position curtailed the development of the program.

Fannie and Freddie do, indeed, hold some mortgages on homes with PACE liens as a result of homeowners who took out PACE loans after their first mortgages were sold to one of the agencies.

Meanwhile, Renewable Funding, based in Oakland, Calif., is already planning the second and largest securitization of loans originated under the PACE program. It is aiming for the first quarter of next year to issue $200 million to $300 million of securities backed by loans to California homeowners.

Earlier this year, the company was contemplating a $100 million offering, but expanded its plans after securing a $300 million credit facility from Apollo Investment in May. That’s in addition to a $100 million warehouse line Renewable has with Citigroup, which will likely run the books on the securitization. Deutsche Bank and Jefferies are also slated to be involved in the deal.

Renewable’s deal and the change in FHFA policy should encourage banks other than Citi to provide warehouse lines for PACE originators, leading to more securitization activity in the sector. “That deal will convince people it’s a real asset class,” said a securitization attorney.

Hedge fund operator 400 Capital has completed the only securitization backed by clean-energy loans, a $103.8 million offering that Deutsche brought to market in March.