Fannie Mae and Freddie Mac issued guidance on Tuesday which advises numerous homeowners that they need to settle first the loans that they incurred on the failed Property Assessed Clean Energy or PACE program prior to any refinancing possibilities of their mortgages.

PACE allowed municipalities in 22 states to sell bonds that were used to fund installation costs of energy efficiency fixtures on homes, which were set to be paid through an annual property tax assessment with corresponding lien imposed on every home in the event of loan defaults by homeowners.

Yet in July, the Federal Housing Finance Agency ruled that the liens imposed ran against federal rules and effectively halted bulk of the PACE programs and exposed many homeowners who had already committed into energy improvement loans.

Now enter Fannie and Freddie, which buy and sell big numbers of the country’s home mortgages, with their guidance firmly stating that borrowers with enough equity in their homes should pay first before they could expect any refinancing.

The guidance should not be a problem for homeowners without sufficient equity as they can refinance with the loan in place yet Fannie Mae sternly warned that it “will not purchase mortgage loans secured by properties with an outstanding PACE obligation unless the terms of the PACE program do not permit priority over first mortgage liens.”

However, proponents of the program argued that PACE paved the way for the installation of expensive solar panel, facilitated for the reductions of greenhouse-gas emissions and created jobs during the process of energy efficiency improvements.

Firmly believing that PACE was actually beneficial than a burden, the California attorney general’s office opposed FHFA’s rulings and filed a lawsuit against Fannie and Freddie in July.

Janill Richards of the deputy attorney general’s office scored the FHFA directive as reflective of its intents to simply kill the program instead of working out a solution to allow the resumption and completion of PACE.

Richards added that the agency’s ruling is a glaring example of how it regarded PACE financing as mere loans, “yet under state law, they’re assessments, and under law, the obligation to pay runs with property and passes on sale.”

She noted too that a similar initiative has been undertaken by the Sierra Club while legislation has been filed in the US Congress to give PACE a much-needed shot in the arm and revive the dormant program.

Also, the Obama administration and some legislators have been conducting series of talks with FHFA to hear out the agency’s concerns and exert some efforts to allow the program to continue.

However, FHFA acting director Edward DeMarco informed Democrat Representative Ed Perlmutter of Colorado on Thursday that the negotiations had collapsed and the agency had maintained its opposition to PACE.

In his letter to the congressman, DeMarco said that PACE is being implemented on states and municipalities without the benefit of uniform standards, which is essential for consumer protection and appropriate underwriting.

He added that such practice was particularly odd for FHFA and “threatening to the safe and sound operations of its regulated entities and directed that appropriate steps be taken to address such risks.”