By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, July 6, 2010; 7:43 PM
A program that encourages homeowners to take on debt to make their homes more energy efficient could damage the already fragile mortgage system and leave homeowners at risk, financial regulators said Tuesday.
The Federal Housing Finance Agency (FHFA), which oversees mortgage finance giants Fannie Mae and Freddie Mac, urged state and local governments to put the program on hold and reconsider it.
The initiative enables homeowners to install insulation, new windows and the like using loans that get tacked onto their property tax bills. The loans typically place a first lien on the property, meaning they leapfrog ahead of mortgages in line for repayment. The loans stay with the property if it is sold or foreclosed upon.
The loans could be packaged into bonds, spawning a new market for Wall Street and giving bond investors a highly protected investment.
But the FHFA said they come with potential pitfalls.
The lending is not based on the homeowner's ability to pay, it bypasses consumer protections such as the Truth-in-Lending Act, and it may not lead to meaningful reductions in energy consumption, the FHFA said. It could undermine the lenders that provide home mortgages and investors in securities backed by mortgages by changing the economics of those arrangements, the FHFA said.
The Office of the Comptroller of the Currency, a bank regulator, said the approach "raises significant safety and soundness concerns."
The program is known as Property Assessed Clean Energy, or PACE, because it piggybacks on property tax assessments.
About $150 million from the 2009 economic stimulus act have been allotted for state and local PACE programs.
In light of the regulators' opposition, the Department of Energy is working with local governments to pursue approaches that do not give the PACE loans a first lien, an Energy official said.
"The Obama Administration is making a broad portfolio of investments in energy efficiency to create jobs and help homeowners save money. PACE pilot programs are one part of this much larger effort," Department of Energy spokeswoman Jen Stutsman said by e-mail.
The loans could encourage homeowners to make investments in energy efficiency that could take many years to pay off if all goes well.
The Web site of PACENow.org, an organization promoting pace loans, said supporters include environmental groups, real estate companies, and financial firms such as Goldman Sachs.