Recent U.S. Regulatory Developments Regarding Renewable Energy Loans

In an effort to promote renewable energy sources and efficient energy consumption, more than 25 states have instituted Property Assessed Clean Energy (PACE) programs. Started in 2008, PACE programs authorize local governments to make loans to homeowners for energy related home-improvement projects such as the installation of solar panels or energy efficient windows. Local governments raise the capital needed for the loans by issuing bonds to private investors. Homeowners then repay the loans through assessments added to their property taxes. The loan attaches to the property such that if the home is sold before repayment is complete the subsequent purchaser of the home assumes the obligation to pay the remainder. The program benefits homeowners by defraying the high initial cost of energy projects. It also benefits private investors by using the property-tax system as the vehicle for repayment.

A previous DechertOnPoint1discussed the potential for securitization of PACE loans as well as some of the regulatory and industry related discourse. This DechertOnPoint dis-cusses recent regulatory actions which may affect PACE loans and some of the considera-tions that should be taken into account when financing or securitizing such loans.

Regulatory Action

Mortgage holders have raised concerns about provisions in many PACE programs which give liens securing PACE loans priority over mort-gages.2 The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collective-ly, the GSEs) oppose such first-lien provisions, arguing that they increase the risk of a mort-gage shortfall in the event of a foreclosure. The risk is higher, they argue, because the lender has to pay off any past-due payments on the lien before it can resell the property. Further-more, the property value itself may be dimi-nished to the extent that new purchasers, who may not value the installation, will decrease their bidding price to offset the remaining PACE loan.3

In response to such concerns, the Federal Housing Finance Agency (FHFA), as conservator of the GSEs, directed the GSEs to stop purchas-ing mortgage loans secured by properties with outstanding first-lien PACE obligations.4 Several groups brought suit in response to the FHFA's directive, alleging that the FHFA failed to use the notice and comment procedure as required by law. A California federal district court agreed, and issued a preliminary injunction against the...