The Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac, has issued a proposed rule that would prohibit the GSEs from purchasing loans affected by the Property Assessed Clean Energy program.

PACE is a local government initiative designed to help homeowners finance energy-efficient and renewable energy projects for their homes.

Homeowners repay the government for the financing through property tax adjustments.

PACE “moves ahead of the pre-existing first mortgage in lien priority, and thereby subordinates Fannie Mae and Freddie Mac security interests in the property,” according to a statement from the FHFA announcing the proposed rule.

As such, “PACE financing arrangements present a safety and soundness concern by transferring financial risks to the regulated entities and lacking in adequate consumer protections and standards for energy retrofitting,” the FHFA stated.

When FHFA publicized an advance notice of proposed rulemaking earlier this year, the National Association of Realtors commented that the “first lien position of PACE loans adds an unnecessary risk and may threaten mortgage markets during the current fragile recovery of real estate markets.”

FHFA’s proposed rule is open for comment for 45 days from its date of publication, June 15.

PACE financing for energy-efficient projects is available in 18 states and the District of Columbia, according to the PACE website.