Given the popularity of Property Assessed Clean Energy loan programs in many municipalities around the country, it was unrealistic to expect all of these communities to quietly abide by Fannie Mae and Freddie Mac’s declaration, in early May, that the companies would no longer guarantee mortgages for properties with PACE-related liens.

Like most special property taxes levied by municipalities, PACE loans, which are funded by local bond issues and intended to help homeowners finance energy efficiency improvements, have “super-priority lien” status, meaning they take priority over whatever private financing a homeowner may have, including a conventional mortgage. Fannie and Freddie worry that these energy-related liens will further burden taxpayers if PACE-participating homeowners default on their mortgages.

The Fannie-Freddie ruling puzzled many PACE-friendly civic leaders, who wondered whether it would also apply to every other special property tax that might be applied to a homeowner’s bill. In some parts of the country, though, the ruling raised a ruckus.

Taking up the PACE cause

On July 12, the Long Island town of Babylon, New York, which had launched a PACE program two years ago, threatened to sue Fannie and Freddie. On July 14, California, led by the state’s attorney general, Jerry Brown, took things a step further and actually filed suit against the two mortgage giants. On July 15, Democrats in the House of Representatives, led by Mike Thompson of northern California and Steve Israel of New York, introduced a bill that would ban lenders from imposing penalties or stricter criteria on municipalities that use PACE, and would prevent lenders from requiring homeowners to pay off property assessments, including PACE loans, before refinancing their mortgages or selling their property.

And on Monday, Israel, three other members of Congress, and members of the Obama administration met with the Federal Housing Finance Agency – Fannie and Freddie’s conservator – to propose allowing a 30-month pilot project that would include awarding PACE loans for improvements to 300,000 homes. The project’s principal intent would be to objectively evaluate the level of risk in the energy-related liens.

Israel told the Grist, a newspaper that serves the Babylon area, that FHFA countered by suggesting a 10,000-home sampling. Israel said that sample size would be far too small to be statistically significant. FHFA has promised to come up with yet another proposal this week. Israel says he’s looking forward to it.

“We’ll see how serious they are,” he said. “I think they clearly understood that Congress is not backing down on this and they simply have to work with us.”