ALTA: Clean energy loans could harm real estate transactions

07/28/2010
The title insurance industry's trade organization is seeking federal guidance on a loan program that could affect how homes are bought and sold.

Ambiguity over Property Assessed Clean Energy loans caused disputes between federal and local governments. At odds is whether the arrangements are officially considered a property tax assessment or a loan. That classification could affect homebuyers and sellers, because outstanding debts held on property make it difficult to establish land ownership, said the American Land Title Association.

The program started in Berkeley, California, allowing homeowners and businesses to finance energy-efficient updates with a loan that is paid back through an assessment on their yearly property taxes, according to PACENow.org. About 21 states adopted the program until it was stalled by the Federal Housing Finance Agency early in July, reported the San Francisco Chronicle.

In a July 6 statement, the FHFA said it would put the program on hold until federal mortgage insurers Fannie Mae and Freddie Mac, and the Federal Home Loan Banks, could perform a review. PACE loans establish first liens on mortgages, which are claims against a property for the payment of a debt. Since the PACE loans are handled as property tax assessments, those liens take top priority over the repayment of a mortgage if the homeowner defaults on the loan. That creates an elevated risk for lenders and mortgage investors, said the FHFA.

States immediately slammed the FHFA decision. The state of California and Sonoma County filed separate lawsuits against the agency, arguing that the federal government cannot regulate how individual counties handle property taxes, reported Sonoma County's Press Democrat. Additionally, state representative Michael Thompson submitted legislation to Congress on July 15 that would protect the programs.

ALTA CEO Kurt Pfotenhauer seemed to share the FHFA's concerns over the official classification of PACE loans. In a letter to the agency, he asked for clarification on how PACE liens were created and administered, writing "without establishing standards for determining title to property, PACE loans run the risk of significant losses due to fraud. In addition to harming PACE participants, it also damages local property records, and results in increased costs of underwriting, claims, escrow services and compliance for the land title industry."

For now, lawmakers and title insurers must assess the nature of the loans before they can return to the market.