Introduction

Fannie Mae has recently received questions from lenders regarding certain state and countysponsored programs that make loans available to residential homeowners for energy efficiency improvements tied to tax assessments. Approximately ten states have enacted laws allowing localities to establish programs to finance energy efficient home improvements, and other states may be considering similar legislation. Under these laws, localities or private lenders loan funds  to participating homeowners. These loans are generally treated as special assessments and are levied and collected in the same manner as real property tax assessments. The resulting energy loan has priority over all existing liens, other than liens related to real property taxes.

These energy efficiency loan programs are sometimes referred to as Property Assessed Clean Energy (PACE) programs, or Energy Loan Tax Assessment Programs (ELTAPs). Depending on the jurisdiction, ELTAPs may be used to fund energy efficiency improvements such as new windows, insulation, and solar panels. The specific implementation (e.g., maximum loan amount, permitted purpose, etc.) differs from county to county. Typically, homeowners repay ELTAP loans via their property tax bill, and in the event of non-payment, the ELTAPs have priority over Fannie Mae’s mortgage lien.

ELTAPs bear similarity to special assessments, which may be imposed by local governments or homeowner’s associations, generally to make improvements to a community’s infrastructure such as roads, water, or sewer. However, ELTAPs differ in that they are a loan made by a government or private entity to fund improvements to the borrower’s private residence, and the total obligation is generally considerably higher.

Note: ELTAPs are not eligible for sale to Fannie Mae. Rather, this Lender Letter is intended to alert lenders to issues concerning ELTAPs in the underwriting and servicing of Fannie Mae mortgages.

Underwriting and Servicing Mortgage Loans with an ELTAP

As ELTAPs have the potential to become a first lien if unpaid, and increase the borrowers total debt obligations, Fannie Mae is reviewing its underwriting guidelines to determine appropriate requirements in jurisdictions that have enacted legislation establishing ELTAPs. Until such guidelines are issued, lenders should treat ELTAP payments as a special assessment in underwriting a borrower where the security property is subject to an existing ELTAP loan. A letter from the Federal Housing Finance Administration, Fannie Mae’s regulator, with more information on ELTAPs, can be found on eFannieMae.com.

Servicers should treat ELTAPs as any tax or assessment that may take priority over Fannie Mae’s lien. Therefore, if a servicer maintains an escrow account for a borrower that has an ELTAP, the servicer should also escrow amounts necessary to make the ELTAP payment when due. ELTAP payments should be considered during the borrower’s annual escrow analysis. Servicers are reminded that Part III of the Servicing Guide requires that servicers advance payments necessary to keep current all real estate taxes, special assessments and other obligations that may take priority over Fannie Mae’s lien. Therefore, if the borrower fails to make ELTAP payments when due, or in the event that escrow funds are insufficient to cover the ELTAP payments, servicers must advance its own funds to bring the ELTAP current.

About Safeguard
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, Ohio and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees and a handful of contractors performing services in the Midwest, to a national company with over 700 employees. Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.