Earlier this week, the Federal Housing Finance Agency issued a letter imposing new restrictions on homeowners’ ability to take advantage of Property Assessed Clean Energy legislation (“PACE”), immediately causing a stir among the building and energy communities.

PACE legislation allows homeowners to repay the cost of installing solar panels and other energy improvements through an annual surcharge on their property taxes. Approximately 20 states, including Georgia, have passed PACE enabling legislation, and a 24-month trial for nationwide PACE programs (supported by Department of Energy stimulus funds) was set to begin this month.

In its July 6, 2010 letter, the Federal Housing Finance Agency (FHFA) stated it determined that such lending programs “present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”

FHFA wrote that when a municipality pays for energy efficiency upgrades through PACE, a lien is placed on the home, which lien takes priority over the mortgage if the homeowner defaults. (This priority status is granted in most, but not all, states.)

The agency stated that these first liens “pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors.” Accordingly, FHFA urged state and local governments to reconsider PACE programs as it asserted they “are not essential for successful programs to spur energy conservation.”

Supporters of PACE immediately countered stating the programs are essential and that FHFA’s decision ignored the significant analysis undertaken by various government agencies, as well as penalizes progress and communities offering incentives and/or implementing PACE enabling legislation.

A copy of the July 6, 2010 letter of the Federal Housing Finance Agency is available at: http://fhfa.gov/webfiles/15884/PACESTMT7610.pdf