[Federal Register Volume 77, Number 17 (Thursday, January 26, 2012)]
[Proposed Rules]
[Pages 3958-3964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-1345]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1254
RIN 2590-AA53
Mortgage Assets Affected by PACE Programs
AGENCY: Federal Housing Finance Agency.
ACTION: Advance notice of proposed rulemaking; request for comments;
Notice of intent to prepare environmental impact statement; request for
scoping comments.
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SUMMARY: The Federal Housing Finance Agency (``FHFA'') hereby issues
this Advance Notice of Proposed Rulemaking (``ANPR'') concerning
mortgage assets affected by Property Assessed Clean Energy (``PACE'')
programs and Notice of Intent (``NOI'') to prepare an environmental
impact statement (``EIS'') under the National Environmental Policy Act
(``NEPA'') to address the potential environmental impacts of FHFA's
proposed action.
The United States District Court for the Northern District of
California issued a preliminary injunction ordering FHFA ``to proceed
with the notice and comment process'' in adopting guidance concerning
mortgages that are or could be affected by PACE programs. Specifically,
the California District Court ordered FHFA to ``cause to be published
in the Federal Register an Advance Notice of Proposed Rulemaking
relating to the statement issued by FHFA on July 6, 2010, and the
letter directive issued by FHFA on February 28, 2011, that deal with
property assessed clean energy (PACE) programs.''
In response to and compliance with the California District Court's
order, FHFA is seeking comment on whether the restrictions and
conditions set forth in the July 6, 2010 Statement and the February 28,
2011 Directive should be maintained, changed, or eliminated, and
whether other restrictions or conditions should be imposed. FHFA has
appealed the California District Court's order to the U.S. Court of
Appeals for the Ninth Circuit (the ``Ninth Circuit''). Inasmuch as the
California District Court's order remains in effect pending the outcome
of the appeal, FHFA is proceeding with the publication of this ANPR and
NOI pursuant to that order. The Ninth Circuit has stayed, pending the
outcome of FHFA's appeal, the portion of the California District
Court's Order requiring publication of a final rule. FHFA reserves the
right to withdraw this ANPR and NOI should FHFA prevail in its appeal,
and may in that situation continue to address the financial risks FHFA
believes PACE programs pose to safety and soundness through means other
than notice-and-comment rulemaking.
DATES: Written comments must be received on or before March 26, 2012.
ADDRESSES: You may submit your comments, identified by regulatory
information number (RIN) 2590-AA53, by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov:
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at [email protected] to ensure timely receipt by FHFA.
Please include ``RIN 2590-AA53'' in the subject line of the message.
[[Page 3959]]
Email: Comments to Alfred M. Pollard, General Counsel may
be sent by email to [email protected]. Please include ``RIN 2590-
AA53'' in the subject line of the message.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA53, Federal
Housing Finance Agency, Eighth Floor, 400 Seventh Street SW.,
Washington, DC 20024.
Hand Delivered/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA53,
Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW.,
Washington, DC 20024. The package should be logged at the Seventh
Street entrance Guard Desk, First Floor, on business days between 9
a.m. and 5 p.m.
FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel,
(202) 649-3050 (not a toll-free number), Federal Housing Finance
Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC 20024. The
telephone number for the Telecommunications Device for the Hearing
Impaired is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects of this ANPR and NOI.
Commenters should identify by number, the question each of their
comments addresses. Copies of all comments will be posted without
change, including any personal information you provide, such as your
name and address, on the FHFA Web site at https://www.fhfa.gov. In
addition, copies of all comments received will be available for
examination by the public on business days between the hours of 10 a.m.
and 3 p.m. at the Federal Housing Finance Agency, Eighth Floor, 400
Seventh Street SW., Washington, DC 20024. To make an appointment to
inspect comments, please call the Office of General Counsel at (202)
649-3804.
II. Background
A. FHFA's Statutory Role and Authority as Regulator
FHFA is an independent federal agency created by the Housing and
Economic Recovery Act of 2008 (HERA) to supervise and regulate the
Federal National Mortgage Association (Fannie Mae), the Federal Home
Loan Mortgage Corporation (Freddie Mac), (together, the Enterprises),
and the Federal Home Loan Banks (the ``Banks''). FHFA is the exclusive
supervisory regulator of the Enterprises and the Banks. Both
Enterprises are presently in conservatorship under the direction of
FHFA as Conservator. 12 U.S.C. 4501 et seq. Congress established FHFA
in the wake of a national crisis in the housing market. A key purpose
of HERA was to create a single federal regulator with all of the
authority necessary to oversee Fannie Mae, Freddie Mac, and the Banks.
12 U.S.C. 4511(b)(2).
Fannie Mae and Freddie Mac operate in the secondary mortgage
market. Accordingly, they do not directly lend funds to home
purchasers, but instead buy mortgage loans from original lenders,
thereby providing funds those entities can use to make additional
loans. The Enterprises hold in their own portfolios a fraction of the
mortgage loans they purchase. The Enterprises also securitize a
substantial fraction of the mortgage loans they purchase, packaging
them into pools and selling interests in the pools as mortgage-backed
securities. Traditionally, the Enterprises guarantee nearly all of the
mortgage loans they securitize. Together, the Enterprises own or
guarantee more than $5 trillion in residential mortgages.
FHFA's ``Director shall have general regulatory authority over each
[Enterprise] * * *, and shall exercise such general regulatory
authority * * * to ensure that the purposes of this Act, the
authorizing statutes, and any other applicable law are carried out.''
12 U.S.C. 4511(b)(2). As regulator, FHFA is charged with ensuring that
the Enterprises operate in a ``safe and sound manner.'' 12 U.S.C.
4513(a). FHFA is statutorily authorized ``to exercise such incidental
powers as may be necessary or appropriate to fulfill the duties and
responsibilities of the Director in the supervision and regulation'' of
the Enterprises. 12 U.S.C. 4513(a)(2). FHFA's Director is authorized to
``issue any regulations or guidelines or orders as necessary to carry
out the duties of the Director * * *.'' Id. 4526(a). FHFA's regulations
are subject to notice-and-comment rulemaking under the Administrative
Procedure Act.
B. FHFA's Statutory Role and Authority as Conservator
HERA also authorizes the Director of FHFA to ``appoint the Agency
as conservator or receiver for a regulated entity * * * for the purpose
of reorganizing, rehabilitating or winding up [its] affairs.'' Id.
4617(a)(1), (2). On September 6, 2008, FHFA placed Fannie Mae and
Freddie Mac into conservatorships. FHFA thus ``immediately succeed[ed]
to all rights, titles, powers, and privileges of the shareholders,
directors, and officers of the [Enterprises].'' Id. 4617(b)(2)(B).
In its role as Conservator, FHFA may take any action ``necessary to
put the regulated entity into sound and solvent condition'' or
``appropriate to carry on the business of the regulated entity and
preserve and conserve the assets and property of the regulated
entity.'' Id. 4617(b)(2)(D). The Conservator also may ``take over the
assets of and operate the regulated entity in the name of the regulated
entity,'' ``perform all functions of the entity'' consistent with the
Conservator's appointment, and ``preserve and conserve the assets and
property of the regulated entity.'' Id. 4617(b)(2)(A), (B). The
Conservator may take any authorized action ``which the Agency
determines is in the best interests of the regulated entity or the
Agency.'' Id. 4617(b)(2)(J). ``The authority of the Director to take
actions [as Conservator] shall not in any way limit the general
supervisory and regulatory authority granted'' by HERA. 12 U.S.C.
4511(c).
C. Issues Relating to PACE Programs That Are Relevant to FHFA's
Supervision and Direction of the Enterprises
PACE programs provide a means of financing certain kinds of home-
improvement projects. Specifically, PACE programs permit local
governments to provide financing to property owners for the purchase of
energy-related home-improvement projects, such as solar panels,
insulation, energy-efficient windows, and other products. Homeowners
repay the amount borrowed, with interest, over a period of years
through ``contractual assessments'' added to their property tax bill.
Over the last three years, more than 25 states have passed legislation
authorizing local governments to set up PACE-type programs. Such
legislation leaves most program implementation and standards to local
governmental bodies and provides no uniform requirements or enforcement
mechanisms.
In most, but not all, states that have implemented PACE programs,
the liens that result from PACE program loans have priority over
mortgages, including pre-existing first mortgages.\1\ In such programs,
the PACE lender ``steps ahead'' of the mortgage holder (e.g., a Bank,
Fannie Mae, or Freddie Mac) in
[[Page 3960]]
priority of its claim against the collateral, and such liens ``run''
with the property. As a result, a mortgagee foreclosing on a property
subject to a PACE lien must pay off any accumulated unpaid PACE
assessments (i.e., past-due payments) and remains responsible for the
principal and interest payments that are not yet due (i.e., future
payments) on the PACE obligation. Likewise, if a home is sold before
the homeowner repays the city or county, the purchaser of the home
assumes the obligation to pay the remainder. The mortgage holder is
also at risk in the event of foreclosure for any diminution in the
value of the property caused by the outstanding lien or the retrofit
project, which may or may not be attractive to potential purchasers.
Also, the homeowner's assumption of this new obligation may itself
increase the risk that the homeowner will become delinquent or default
on other financial obligations, including any mortgage obligations.\2\
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\1\ In at least four states--Maine, New Hampshire, Oklahoma, and
Vermont--legislation provides that the PACE lien does not
subordinate a first mortgage on the subject property. FHFA
understands that under legislation now pending in Connecticut, PACE
programs in that state also would not subordinate first mortgages.
\2\ In many PACE programs, the allowable amount of a loan is
based on assessed property value and may not consider the borrower's
ability to repay. States have considered permitting loan levels of
10% to 40% of the assessed value of the underlying property.
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Typically, PACE programs serve as a channel through which private-
sector capital flows through the local government to the homeowner-
borrower (or the homeowner-borrower's contractors). While PACE programs
vary in the particular mechanisms they use to raise capital, in many
instances private investors provide the capital by purchasing bonds
secured by the payments that homeowner-borrowers make on their PACE
obligations. From the capital provider's perspective, one advantage of
channeling the funding through a local government, rather than lending
directly to the homeowner-borrower or channeling the funds through a
private enterprise, is that the local government is able to use the
property-tax assessment system as the vehicle for repayment. Because of
the ``lien-priming'' feature of most PACE programs, the capital
provider effectively ``steps ahead'' of all other private land-secured
lenders (including mortgage lenders) in priority, thereby minimizing
the financial risk to the capital provider while downgrading the
priority of first and second mortgages, and of any other property-
secured financial obligation.
Proponents of PACE programs have analogized the obligations to
repay PACE loans to traditional tax assessments. However, unlike
traditional tax assessments, PACE loans are voluntary--homeowners opt
in, submit applications, and contract with the city or county's PACE
program to obtain the loan. Each participating property owner controls
the use of the funds, selects the contractor who will perform the
energy retrofit, owns the energy retrofit fixtures and must repair the
fixtures should they become inoperable, including during the time the
PACE loan remains outstanding. Each locality sets its own terms and
requirements for homeowner and project eligibility for PACE loans; no
uniform national standards exist. Nothing in PACE requires that local
governments adopt and implement nationally uniform financial
underwriting standards, such as minimum total loan-to-value ratios that
take into account either: (i) Total debt or other liens on the
property; or (ii) the possibility of subsequent declines in the value
of the property. Many PACE programs also do not employ standard
personal creditworthiness requirements, such as limits on FICO score or
total debt-to-income ratio, although some include narrower
requirements, such as that the homeowner-borrower be current on the
mortgage and property taxes and not have a recent bankruptcy history.
Some local PACE programs communicate to homeowners that incurring a
PACE obligation may violate the terms of their mortgage documents.\3\
Similarly, some cities and counties provide forms that participants can
use to obtain the lender's consent or acknowledgment prior to
participation.\4\
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\3\ See, e.g., Yucaipa Loan Application at 2-3, 10, http://www.yucaipa.org/cityPrograms/EIP/PDF_Files/Application.pdf (last
visited Jan. 12, 2012); Sonoma Application at 2, http://www.sonomacountyenergy.org/lower.php?url=reference-forms-new&catid=603 (document at ``Application'' link) (last visited Jan.
12, 2012).
\4\ Sonoma Lender Acknowledgement, http://www.sonomacountyenergy.org/lower.php?url= reference-forms-
new&catid=606 (pages 4-7 of document at ``Lender Info and
Acknowledgement'' link) (last visited Jan. 12, 2012).
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State legislation authorizing PACE programs gained notoriety in
2008. As PACE programs were being considered by more states, FHFA began
to evaluate their implementations and potential impact on the
portfolios of FHFA-regulated entities. On June 18, 2009, FHFA issued a
letter and background paper raising concerns about PACE programs that
retroactively created first liens. To discuss the risks to lenders and
the Enterprises as well as borrowers, FHFA met over the next year with
PACE stakeholders, other federal agencies, and state and local
authorities around the country.
On May 5, 2010, in response to continuing questions about PACE
programs, Fannie Mae and Freddie Mac issued advisories (``Advisories'')
to lenders and servicers of mortgages owned or guaranteed by the
Enterprises.\5\ The May 5, 2010 Advisories referred to Fannie Mae's and
Freddie Mac's jointly developed master uniform security instruments
(``USIs''), which prohibit liens senior to that of the mortgage.\6\
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\5\ Fannie Mae Lender Letter LL-2010-06 (May 5, 2010), available
at https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/ll1006.pdf; Freddie Mac Industry Letter (May 5, 2010), available at
http://www.freddiemac.com/sell/guide/bulletins/pdf/iltr050510.pdf.
\6\ The relevant provision appears in Section 4. See, e.g.,
Freddie Mac Form 3005, California Deed of Trust, available at http://www.freddiemac.com/uniform/doc/3005-CaliforniaDeedofTrust.doc;
Fannie Mae Form 3005, California Deed of Trust, available at https://www.efanniemae.com/sf/formsdocs/documents/secinstruments/doc/3005w.doc.
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Shortly after the May 5, 2010 Advisories were issued, FHFA received
a number of inquiries seeking FHFA's position.\7\ On July 6, 2010, FHFA
issued the Statement, which provides:
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\7\ Letter from Edmund G. Brown, Jr. to Edward DeMarco (May 17,
2010); Letter from Edmund G. Brown, Jr. to Edward DeMarco (June 22,
2010).
[T]he Federal Housing Finance Agency (FHFA) has determined that
certain energy retrofit lending programs present significant safety
and soundness concerns that must be addressed by Fannie Mae, Freddie
Mac and the Federal Home Loan Banks. * * *
First liens established by PACE loans are unlike routine tax
assessments and pose unusual and difficult risk management
challenges for lenders, servicers and mortgage securities investors.
* * *
They present significant risk to lenders and secondary market
entities, may alter valuations for mortgage-backed securities and
are not essential for successful programs to spur energy
conservation.\8\
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\8\ FHFA Statement on Certain Energy Retrofit Loan Programs
(July 6, 2010), available at http://www.fhfa.gov/webfiles/15884/PACESTMT7610.pdf.
The Statement directed that the May 5, 2010 Advisories ``remain in
effect'' and that the Enterprises ``should undertake prudential actions
to protect their operations,'' including: (i) Adjusting loan-to-value
ratios; (ii) ensuring that loan covenants require approval/consent for
any PACE loans; (iii) tightening borrower debt-to-income ratios; and,
(iv) ensuring that mortgages on properties with PACE liens satisfy all
applicable federal and state lending regulations. However, FHFA
directed these actions on a prospective basis only, directing in the
Statement that any prohibition against such liens in the Enterprises'
USIs be waived as to PACE obligations already in existence as of July
6, 2010.
On February 28, 2011, the Conservator issued a directive stating
the Agency's view that PACE liens
[[Page 3961]]
``present significant risks to certain assets and property of the
Enterprises--mortgages and mortgage-related assets--and pose unusual
and difficult risk management challenges.'' FHFA thus directed the
Enterprises to ``continue to refrain from purchasing mortgage loans
secured by properties with outstanding first-lien PACE obligations.''
Id. In all its statutory capacities, FHFA is empowered to act
decisively to avoid risk to the Enterprises. In conservatorship, with
taxpayer support, this obligation is emphasized by express
Congressional directions on conservator duties.
Several parties brought legal challenges to the process by which
FHFA issued the July 6, 2010 Statement and the February 28, 2011
Directive, as well as to their substance. The United States District
Courts for the Northern District of Florida, the Southern District of
New York, and the Eastern District of New York all dismissed lawsuits
presenting such challenges. The United States District Court for the
Northern District of California (the ``California District Court''),
however, has allowed such a lawsuit to proceed and has issued a
preliminary injunction ordering FHFA ``to proceed with the notice and
comment process'' in adopting guidance concerning mortgages that are or
could be affected by PACE programs. Specifically, the California
District Court ordered FHFA to ``cause to be published in the Federal
Register an Advance Notice of Proposed Rulemaking relating to the
statement issued by FHFA on July 6, 2010, and the letter directive
issued by FHFA on February 28, 2011, that deal with property assessed
clean energy (PACE) programs.'' The California District Court further
ordered that ``[i]n the Advance Notice of Proposed Rulemaking, FHFA
shall seek comments on, among other things, whether conditions and
restrictions relating to the regulated entities' dealing in mortgages
on properties participating in PACE are necessary; and, if so, what
specific conditions and/or restrictions may be appropriate.'' The
California District Court also ordered that ``[t]he comment period
shall not be less than 60 days.'' The California District Court neither
invalidated nor required FHFA to withdraw the July 6, 2010 Statement or
the February 28, 2011 Directive, both of which remain in effect.
In response to and compliance with the California District Court's
order, FHFA is seeking comment on whether the restrictions and
conditions set forth in the July 6, 2010 Statement and the February 28,
2011 Directive should be maintained, changed, or eliminated, and
whether other restrictions or conditions should be imposed. FHFA has
appealed the California District Court's order to the U.S. Court of
Appeals for the Ninth Circuit (the ``Ninth Circuit''). Inasmuch as the
California District Court's order remains in effect pending the outcome
of the appeal, FHFA is proceeding with the publication of this ANPR and
NOI pursuant to that order. The Ninth Circuit has stayed, pending the
outcome of FHFA's appeal, the portion of the California District
Court's Order requiring publication of a final rule. FHFA reserves the
right to withdraw this ANPR and NOI should FHFA prevail in its appeal,
and may in that situation continue to address the financial risks FHFA
believes PACE programs pose to safety and soundness through means other
than notice-and-comment rulemaking.
This ANPR and NOI reviews FHFA's statutory authority as the federal
supervisory regulator of the Enterprises, reviews FHFA's statutory role
and authority as the Conservator of each Enterprise, summarizes issues
relating to PACE that are relevant to FHFA's supervision and direction
of the Enterprises, suggests subjects relating to PACE on which FHFA
might issue a proposed rule or otherwise provide guidance to the
Enterprises within the governing statutory framework, and invites
comments from the public.
III. Issues as to Which FHFA Seeks Comment
In light of the California District Court's order and the
background information provided above, FHFA seeks comments on the
following issues regarding the Enterprises' dealing in mortgages on
properties that participate in PACE programs or that could participate
in PACE programs.
A. Conditions and Restrictions Relating to PACE
The California District Court called upon FHFA to seek comments on
whether conditions and restrictions relating to the regulated entities'
dealing in mortgages on properties participating in PACE programs are
necessary; and, if so, what specific conditions and/or restrictions may
be appropriate. In the July 6, 2010 Statement and the February 28, 2011
Directive, FHFA imposed certain conditions and restrictions relating to
the Enterprises' dealing in mortgages on properties participating in
PACE programs. FHFA thus will take comments on whether those
restrictions and conditions should be maintained, changed, or
eliminated, and whether other restrictions or conditions should be
imposed. Accordingly, FHFA requests comment on the following question:
Question 1: Are conditions and restrictions relating to FHFA-
regulated entities' dealings in mortgages on properties participating
in PACE programs necessary? If so, what specific conditions and/or
restrictions may be appropriate?
B. Financial Risk to the Enterprises Resulting From Subordination of
Mortgage Security Interests to PACE Liens
FHFA is concerned that PACE programs that involve subordination of
any mortgage holder's security interest in the underlying property to
that of the provider of PACE financing may increase the financial risk
borne by the Enterprises as holders of mortgages on properties subject
to PACE obligations, as well as mortgage-backed securities based on
such mortgages. FHFA believes that any such increase in the financial
risk on mortgages and mortgage-backed securities already in the
Enterprise portfolios, especially if imposed without Enterprise
consent, may present significant safety and soundness concerns. In
light of that concern, FHFA requests comment on the following three
questions regarding financial risks to the Enterprises relating to the
subordination of mortgage security interests to PACE liens:
Question 2: How does the lien-priming feature of first-lien PACE
obligations affect the financial risks borne by holders of mortgages
affected by PACE obligations or investors in mortgage-backed securities
based on such mortgages? To the extent that the lien-priming feature of
first-lien PACE obligations increases any financial risk borne by
holders of mortgages affected by PACE obligations or investors in
mortgage-backed securities based on such mortgages, how and at what
cost could such parties insulate themselves from such increased risk?
Question 3: How does the lien-priming feature of first-lien PACE
obligations affect any financial risk that is borne by holders of
mortgages affected by PACE obligations or investors in mortgage-backed
securities based on such mortgages and that relates to any of the
following:
The total amount of debt secured by the subject property
relative to the value of the subject property (i.e., Combined Loan to
Value Ratio for the property or other measures of leverage);
The amount of funds available to pay for energy-related
home-improvement projects after the subtraction of administrative fees
or any other program expenses charged or
[[Page 3962]]
deducted before funds become available to pay for an actual PACE-funded
project (FHFA understands such fees and expenses can consume up to 10%
or more of the funds a borrower could be obligated to repay under some
PACE programs);
The timing and nature of advancements in energy-efficiency
technology;
The timing and nature of changes in potential homebuyers'
preferences regarding particular kinds of energy-efficiency projects;
The timing, direction, and magnitude of changes in energy
prices; and,
The timing, direction, and magnitude of changes of
property values, including the possibility of downward adjustments in
value?
Question 4: To the extent that the lien-priming feature of first-
lien PACE obligations increases any financial risk that is borne by
holders of mortgages affected by PACE obligations or investors in
mortgage-backed securities based on such mortgages and that relates to
any of the following, how and at what cost could such parties insulate
themselves from that increase in risk:
The total amount of debt secured by the subject property
relative to the value of the subject property (i.e., Combined Loan to
Value Ratio for the property or other measures of leverage);
The amount of funds available to pay for energy-related
home-improvement projects after the subtraction of administrative fees
or any other programs expenses charged deducted before funds become
available to pay for an actual PACE funded project (FHFA understands
such fees and expenses can consume up to 10% or more of the funds a
borrower could be obligated to repay under some PACE programs);
The timing and nature of advancements in energy-efficiency
technology;
The timing and nature of changes in potential homebuyer
preferences regarding particular kinds of energy-efficiency projects;
The timing, direction, and magnitude of changes in energy
prices; and,
The timing, direction, and magnitude of changes of
property values, including the possibility of downward adjustments in
value?
C. PACE and the Market for Home-Improvement Financing
FHFA is concerned that the risks first-lien PACE programs present
to mortgage holders may be unnecessary or unreasonable in light of
other market options for financing home-improvement projects relating
to energy efficiency that do not subordinate mortgage holders' security
interests. In light of that concern, FHFA requests comment on the
following four questions relating to PACE programs and the market for
home-improvement financing:
Question 5: What alternatives to first-lien PACE loans (e.g., self-
financing, bank financing, leasing, contractor financing, utility
company ``on-bill'' financing, grants, and other government benefits)
are available for financing home-improvement projects relating to
energy efficiency? On what terms? Which do and which do not share the
lien-priming feature of first-lien PACE obligations? What are the
relative advantages and disadvantages of each, from the perspective of
(i) The current and any future homeowner-borrower, (ii) the holder of
an interest in any mortgage on the subject property, and (iii) the
environment?
Question 6: How does the effect on the value of the underlying
property of an energy-related home-improvement project financed through
a first-lien PACE program compare to the effect on the value of the
underlying property that would flow from the same project if financed
in any other manner?
Question 7: How does the effect on the environment of an energy-
related home-improvement project financed through a first-lien PACE
program compare to the effect on the environment that would flow from
the same project if financed in any other manner?
Question 8: Do first-lien PACE programs cause the completion of
energy-related home improvement projects that would not otherwise have
been completed, as opposed to changing the method of financing for
projects that would have been completed anyway? What, if any, objective
evidence exists on this point?
D. PACE and Protections for the Homeowner-Borrower
FHFA is concerned that PACE programs may not incorporate features
that adequately protect the interests of the homeowner-borrower, and
that the lack of adequate protection could result in homeowner-
borrowers undertaking PACE projects or selecting PACE financing terms
that increase the financial risks borne by mortgage holders such as the
Enterprises. In light of that concern, FHFA requests comment on the
following five questions relating to PACE and protections for the
homeowner-borrower:
Question 9: What consumer protections and disclosures do first-lien
PACE programs mandate for participating homeowners? When and how were
those protections put into place? How, if at all, do the consumer
protections and disclosures that local first-lien PACE programs provide
to participating homeowners differ from the consumer protections and
disclosures that non-PACE providers of home-improvement financing
provide to borrowers? What consumer protection enforcement mechanisms
do first-lien PACE programs have?
Question 10: What, if any, protections or disclosures do first-lien
PACE programs provide to homeowner-borrowers concerning the possibility
that a PACE-financed project will cause the value of their home, net of
the PACE obligation, to decline? What is the effect on the financial
risk borne by the holder of any mortgage interest in a subject property
if PACE programs do not provide any such protections or disclosures?
Question 11: What, if any, protections or disclosures do first-lien
PACE programs provide to homeowner-borrowers concerning the possibility
that the utility-cost savings resulting from a PACE-financed project
will be less than the cost of servicing the PACE obligation? What is
the effect on the financial risk borne by the holder of any mortgage
interest in a subject property if first-lien PACE programs do not
provide any such protections or disclosures?
Question 12: What, if any, protections or disclosures do first-lien
PACE programs provide to homeowner-borrowers concerning the possibility
that over the service life of a PACE-financed project, the homeowner-
borrower may face additional costs (such as costs of insuring,
maintaining, and repairing equipment) beyond the direct cost of the
PACE obligation? What is the effect on the financial risk borne by the
holder of any mortgage interest in a subject property if first-lien
PACE programs do not provide any such protections or disclosures?
Question 13: What, if any, protections or disclosures do first-lien
PACE programs provide to homeowner-borrowers concerning the possibility
that subsequent purchasers of the subject property will reduce the
amount they would pay to purchase the property by some or all of the
amount of any outstanding PACE obligation? What is the effect on the
financial risk borne by the holder of any mortgage interest in a
subject property if first-lien PACE programs do not provide any such
protections or disclosures?
[[Page 3963]]
E. PACE and Underwriting Standards
FHFA is concerned that first-lien PACE programs may not incorporate
underwriting standards that adequately ensure that the homeowner-
borrower will be able to repay the obligation, and that as a result
homeowner-borrowers may undertake PACE projects, or select PACE
financing terms, that adversely affect the homeowner-borrower's ability
to repay other debt, including mortgage debt. In light of that concern,
FHFA requests comment on the following three questions relating to PACE
and underwriting standards:
Question 14: How do the credit underwriting standards and processes
of PACE programs compare to that of other providers of Home-improvement
financing, such as banks? Do they consider, for example: (i) Borrower
creditworthiness, including an assessment of total indebtedness in
relation to borrower income, consistent with national standards; (ii)
total loan-to-value ratio of all secured loans on the property
combined, consistent with national standards; and (iii) appraisals of
property value, consistent with national standards?
Question 15: What factors do first-lien PACE programs consider in
determining whether to provide PACE financing to a particular
homeowner-borrower seeking funding for a particular project eligible
for PACE financing? What analytic tools presently exist to make that
determination? How, if at all, have the methodologies, metrics, and
assumptions incorporated into such tools been tested and validated?
Question 16: What factors and information do first-lien PACE
programs gather and consider in determining whether a homeowner-
borrower will have sufficient income or cash flow to service the PACE
obligation in addition to the homeowner-borrower's pre-existing
financial obligation? What analytic tools presently exist to make that
determination? How, if at all, have the methodologies, metrics, and
assumptions incorporated into such tools been tested and validated?
F. Considerations Relating to FHFA's Intent To Prepare an EIS
FHFA intends to prepare an EIS to address the potential
environmental impacts of any proposed rule that FHFA may issue
following its consideration of the comments submitted in response to
this ANPR and NOI. To that end, this ANPR and NOI initiates the NEPA
scoping process to identify the environmental issues and reasonable
alternatives to be examined in the EIS, and requests comments regarding
those and other matters related to the scope of the EIS (``EIS Scoping
Comments'').
To ensure that all relevant environmental issues and reasonable
alternatives are addressed, FHFA invites and encourages EIS Scoping
Comments. Interested parties are encouraged to submit their EIS Scoping
Comments within a 60-day scoping period, which begins with publication
of this notice. EIS Scoping Comments received after the end of the
scoping period will be considered to the extent practicable. You may
submit EIS Scoping Comments, identified by regulatory information
number (RIN) 2590-AA53 and marked ``EIS Scoping Comments,'' by any of
the methods identified in the ADDRESSES section above. Submissions may
include both EIS Scoping Comments and other comments, but the EIS
Scoping Comments must be separately identified.
1. Proposed Action
FHFA's Proposed Action would direct the Enterprises not to purchase
any mortgage that is subject to a first-lien PACE obligation or that
could become subject to first-lien PACE obligations without the consent
of the mortgage holder. FHFA believes that the Proposed Action is
reasonable and necessary to limit, in the interest of safety and
soundness, the financial risks that could be involuntarily borne by the
Enterprises, thereby preserving and conserving the Enterprises' assets
and property while protecting American taxpayers from further loss.
2. No Action Alternative
As required by the Council on Environmental Quality regulations
that implement NEPA, the EIS will analyze and present the potential
environmental impacts associated with reasonable alternatives,
including the No Action Alternative.
The No Action Alternative is to withdraw the July 6, 2010 Statement
and the February 28, 2011 Directive. This would allow the Enterprises
to purchase mortgage loans secured by properties with outstanding
first-lien PACE and PACE-like obligations.
3. Other Alternatives
In addition to the Proposed Action and No Action alternatives
described above, FHFA invites comments on reasonable alternatives that
would reduce or avoid known or potential adverse environmental impacts
associated with the proposed action while ensuring that the Enterprises
operate in a safe and sound manner. Accordingly, FHFA requests that for
each reasonable alternative suggested, the commenter explain the
positive, neutral or negative environmental impacts, as well as
potential changes in the level of financial risk borne by holders of
any interest in a mortgage on PACE-affected properties, associated with
the suggested alternative. Accordingly, FHFA specifically requests
comment on the following question:
Question 17: What specific alternatives to FHFA's existing
statements about PACE should FHFA consider? For each alternative, as
compared to the Proposed Action, what positive or negative
environmental effects would result and how would the level of financial
risk borne by holders of any interest in a mortgage on PACE-affected
properties change?
4. Issues and Environmental Resources To Be Examined
To facilitate the scoping process, FHFA has identified a
preliminary approach and list of issues and environmental resources
that it may consider in the EIS. This list is not intended to be all-
inclusive or to predetermine the scope of the EIS, but is intended to
serve as a starting point for public comment.
FHFA intends to develop scenarios (high, medium, and low)
that describe three potential levels of uptake of PACE program loans by
homeowners (irrespective of the Agency's action). These scenarios would
be developed at the regional level and would make assumptions on the
types of home improvement projects (e.g., home insulation, solar
panels, geothermal energy units, etc.) that could be installed. The
``high'' scenario would assume the potential for a high level of uptake
of PACE projects by homeowners. The ``medium'' and ``low'' scenarios
would assume medium and low levels of uptake. FHFA invites comment on
how these scenarios should be developed.
Potential effects of the Proposed Action and alternatives
on the uptake of PACE home improvement projects will be considered. For
each alternative analyzed in detail in the EIS, FHFA would estimate
PACE project implementation for each of the scenarios listed above and
then compare these estimates across the alternatives.
Using assumptions on the types of home improvement
projects that could be implemented, FHFA would estimate the potential
energy and water consumption savings associated with each scenario at
the regional level for each alternative.
FHFA proposes to analyze the potential direct, indirect,
and cumulative environmental impacts of
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the proposed action and alternatives for the following resource areas:
Greenhouse gas emissions; climate change; air pollutant emissions
(including Clean Air Act criteria pollutant emissions); human health;
water conservation; cultural and historic resources; and
disproportionately high and adverse impacts to low-income and minority
populations (environmental justice).
IV. Request for Comments
FHFA invites comments on all of the issues and questions discussed
above, and will consider all comments in developing any proposed rule
that FHFA may issue concerning the Enterprises' dealing in mortgages on
properties participating in PACE programs. As to all questions
enumerated above, commenters should provide supporting data and
documentation for each of their responses, as these will assist FHFA in
its consideration of comments.
Studies addressing relevant aspects of PACE programs may be
submitted for the agency's consideration. FHFA is interested in studies
analyzing:
The effect of PACE-funded improvements on the value of the
underlying property, including differential effects over time and
across markets;
The comparative costs of PACE programs with other means of
financing such as home equity loans, refinance transactions, and
leasing programs;
Payback periods for projects eligible for PACE funding,
considering costs, energy savings, and risks (including risk of changes
in energy pricing or in the level of subsidies or tax credits
available);
The economic life of PACE-funded improvements,
particularly in relation to the term of the PACE loan;
Default rates of PACE and non-PACE loans based on
populations with comparable borrower, loan and property
characteristics; and
Other subjects relating to PACE and the financial risks
PACE programs pose to mortgage holders such as the Enterprises.
All study-related submissions should provide the complete study
protocol; the date(s) the study was proposed, initiated, completed, and
published or otherwise reported; all key assumptions; the sample size;
the data; the results (including sensitivity of reported results to key
assumptions); and any published report of the study. Study-related
submissions should also identify the persons who developed,
implemented, and published or otherwise reported the study, as well as
the principal sources of funding for the study. All data should be
provided in a reasonably accessible computer-readable format, such as
Microsoft Excel files.
Dated: January 19, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2012-1345 Filed 1-25-12; 8:45 am]
BILLING CODE 8070-01-P