Fannie Mae and Freddie Mac will require homeowners with "green energy" loans from municipalities to pay them off when refinancing their mortgages — unless the borrowers don't have enough equity, in which case the green liens can stay.
Property Assessed Clean Energy programs have sprouted around the country, with municipalities lending money to homeowners to pay for energy-efficient improvements such as solar panels. A big problem with these loans, from the mortgage industry's perspective, is that the municipality's lien usually stands in front of the first mortgage to be repaid. So borrowers with Pace loans who have sufficient equity must pay off the existing Pace obligation as a condition of obtaining a new mortgage, the government-sponsored enterprises said Tuesday.
Lenders must first try to qualify the borrower for either a cash-out or a limited cash-out refi, with the Pace loan being paid off with part of the proceeds, Fannie and Freddie said in guidelines issued to lenders. (In a limited cash-out refi, the proceeds left over after the old mortgage is repaid can be used only for certain purposes, usually closing costs.)
But if a lender determines that a borrower does not have sufficient equity to pay off the existing Pace loan, the lender may underwrite the loan as a limited cash-out refi with the Pace loan remaining in place, the GSEs said. The Pace loan payment must be included in the borrower's monthly housing expense calculation, however.
Otherwise, the GSEs said, they will not purchase mortgage loans secured by properties with outstanding Pace loans unless the terms of the local Pace program do not permit priority over first mortgage liens. Lenders are responsible for monitoring state and local law to determine whether a jurisdiction has a Pace program that provides for lien priority, Fannie and Freddie said.
Pace loans are repaid over 20 years through an annual assessment in the borrower's property tax bill. When a home is sold, the new owner becomes responsible for paying the Pace loan.
The requirements announced Tuesday apply for all loans delivered to Fannie and Freddie beginning in early July, when the Federal Housing Finance Agency, the GSEs' regulator and conservator, directed them to develop the guidelines.