The Federal Housing Finance Agency has issued a warning to homeowners, financial institutions and state authorities, citing its concern with super-priority liens created by either energy retrofit programs or homeowner association priority status.
The FHFA issued the warning because in some cases a secondary lien on a property forces the Freddie Mac or Fannie Mae lien into a secondary lien position, which the FHFA says increases the risk of losses to taxpayers.
“Fannie Mae and Freddie Mac, while operating in conservatorship, currently support the housing finance market by purchasing, guaranteeing, and securitizing single-family mortgages,” the FHFA said.
"One of the bedrock principles in this process is that the mortgages supported by Fannie Mae and Freddie Mac must remain in first-lien position, meaning that they have first priority in receiving the proceeds from selling a house in foreclosure,” the FHFA continued.
“As a result, any lien from a loan added after origination should not be able to jump in line ahead of a Fannie Mae or Freddie Mac mortgage to collect the proceeds of the sale of a foreclosed property.”
Of particular concern to the FHFA are energy retrofit financing programs, such as California’s Property Assessed Clean Energy program. Under programs like the PACE program, single-family energy retrofit financing programs can be structured to make loans through the homeowner’s property tax assessment and require that borrowers repay their loans as part of their property tax bill, and that they should have priority over all other loans, including pre-existing Fannie Mae and Freddie Mac mortgages.
According to the FHFA, this structure is a problem.
“In issuing this statement, FHFA wants to make clear to homeowners, lenders, other financial institutions, state officials, and the public that Fannie Mae and Freddie Mac’s policies prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it,” the FHFA said.
According to the FHFA, this restriction has two potential implications for borrowers. “First, a homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage,” the FHFA said. “Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase. These restrictions may reduce the marketability of the house or require the homeowner to pay off the PACE loan before selling the house.”
Additionally, the FHFA issued a warning on homeowner association priority status. Recently, a ruling from the Nevada Supreme Court upheld a law allowing homeowner's associations to foreclose on homes ahead of first-mortgage providers, solidifying “super lien” priority for HOA claims in Nevada.
The FHFA said that it filed an action in federal court in Nevada on Dec. 5, “seeking a determination that a HOA's foreclosure sale is invalid and contrary to federal law to the extent that it purports to extinguish Fannie Mae's property rights.”
The FHFA said that these FHFA actions are based on federal law which “precludes involuntary extinguishment of liens held by Fannie Mae or Freddie Mac while they are operating in conservatorships and bars holders of other liens, including HOAs, from taking any action that would extinguish a Fannie Mae or Freddie Mac lien, security interest or other property interest.”
The FHFA stated that it will continue to enforce its existing policies on super-priority liens, and will “aggressively do so by bringing actions to void foreclosures that purport to extinguish Enterprise property interests in a manner that contravenes federal law.”