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01

The status of PACE (Property Assessed Clean Energy) funding has recently been put on hold by an interpretation of the rules for selling loans to Fannie Mae and Freddie Mac. PACE funding has worked in many areas across the country and several states have designed new programs to use "stimulus bill" funds to set up these PACE revolving loan pools.   Enter Fannie and Freddie! The secondary mortgage market giants FNMA and FHLMC on May 5, 2010, issued Lender Letters to all of the mortgage bankers and mortgage brokers who write and package loans for the secondary market. These lender letters effectively halt the PACE programs that are in place in many states and cities. They point out that loans may not be presented to these agencies if there is a lien that can take priority over the first loan being funded. A PACE loan in many states automatically has first priority along with the general property taxes. If properties with PACE funding in place cannot be sold with "conforming" financing suitable for FNMA and FHLMC funding, they will be at a huge market disadvantage. By the way, FHA loans that now make up about 30% of the residential lending market also get sold through the same secondary market subject to the same rules. (PACE) financing is a tool that has been around a few years. The concept is relatively straightforward: a city or state government issues bonds under its funding authority and uses the money to create a "loan fund". Property owners apply for funds to perform specified types of clean energy improvements to their property. They receive a loan that is paid back along with the property taxes and on the tax bill over the specified time. These loans generally carry much lower interest rates than a home equity loan. This works much like a municipal special assessment for new street lighting or curb and gutter work. The cost of the special work is divided up within a special district and added to the taxes for properties within the district. In the case of PACE funding, the district is one property and the assessment is the amount of the loan for the clean energy improvements. The bonds are paid off from the specially assessed taxes without increasing the general property tax rates of the whole city or state.   This financing tool has always raised the question of what happens if the house is sold before the "loan" is paid off. The answer is that the remaining assessment stays with the property, which makes sense because the improvements are a permanent addition to the performance of that property. The seller does not have to pay off this loan and the buyer does not come up with any more money for purchase or closing. The usually small increment on the property taxes means that the taxes on this home are slightly higher than surrounding properties, but the performance of the home should be commensurately better. Unless the original homeowner got greatly carried away with over-improving the property, the benefits should outweigh the cost.   The resolution to this problem is not clear at this time, but there is a great deal of lobbying and other action to make this program functional again. We will keep you informed about what happens. There is currently a mad flurry of letters (mad is used in multiple ways in this case) between state officials and federal officials about changing the regulations to allow PACE liens to be in place in front of Fannie Mae and Freddie Mac conforming loans. If that doesn't happen, it is possible these amounts would need to be paid off at the time of sale of the property in order to get normal financing.   You can view a letter from seven Senators to Vice President Joe Biden asking for his help in resolving the current situation by clicking here.  

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