Fannie Mae and Freddie Mac's regulator reiterated concerns over "green energy" loan programs and advised the government-sponsored enterprises to adopt new guidelines specific to the loans to protect themselves.
However, the agency also told Fannie and Freddie to make exceptions for homeowners who have already obtained such financing.
In Property Assessed Clean Energy programs around the country, municipalities lend money to homeowners to pay for energy-efficient improvements such as solar panels. The loans are repaid over 20 years through an annual assessment in the borrower's property tax bill. If the home is sold, the new owner is responsible for paying the Pace loan.
Under most programs across the country, Pace liens stand in front of the mortgage to get repaid. In May, Fannie and Freddie told lenders that this subordination feature goes against the GSEs' guidelines for first mortgages, but offered little other guidance. That stirred confusion among lenders and borrowers about whether homes with Pace liens could be financed.
On Tuesday, the FHFA told Fannie and Freddie to waive prohibitions against such senior liens for any homeowner who obtained a Pace loan prior to July 6.
The regulator warned that Pace programs can hurt consumers with "collateral-based lending rather than lending based upon ability-to-pay, the absence of Truth-in-Lending Act and other consumer protections, and uncertainty as to whether the home improvements actually produce meaningful reductions in energy consumption." The new guidelines should adjust loan-to-value ratios to reflect the maximum Pace loan amount available to borrowers and tighten debt-to-income ratios to account for additional obligations under possible future Pace loans, the FHFA said.
"We now have so many states that are signed up for this thing that there was a feeling we just have to say, after all the reviews, we feel this presents an unsafe and unsound situation and for [the GSEs] to take action to protect themselves," said Alfred Pollard, the FHFA's general counsel.
Also Tuesday, the Office of the Comptroller of the Currency advised national banks under its purview to take steps to mitigate risks from exposure to Pace loans.
