FHA to begin insuring mortgages with PACE loans
No super priority loans allowed
The Federal Housing Administration will soon begin insuring mortgages that also carry liens created by energy retrofit programs, as long as the energy lien remains subordinate to the mortgage, the Department of Housing and Urban Development announced Tuesday.
HUD laid the groundwork for this move last year, when it announced its intentions to issue guidance that would preserve the priority status of FHA loans over loans created by the Property Assessed Clean Energy program, also called PACE.
Through the PACE program, homeowners can obtain financing to make improvements to their homes to increase the home’s energy efficiency.
Under programs like PACE, 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, but in some states the PACE liens are given super priority status above the home’s mortgage.
According to HUD, PACE is an “effective way” to finance energy efficiency, renewable energy, water conservation, and other resilience upgrades to homes, including new heating and cooling systems, lighting improvements, solar panels, water pumps, and insulation.
PACE pays the costs for such enhancements and is repaid through an assessment added to the property’s tax bill. State and local governments sponsor PACE financing to encourage energy efficiency, solar energy deployment, advance resilience, create jobs, promote economic development, and protect the environment, HUD said.
Under the new guidelines announced Tuesday, the FHA will now approve purchase and refinance mortgage applications in states that treat PACE obligations as special assessments similar to property taxes, HUD said.
“Today, we’re seizing the opportunity to shape a cleaner and more sustainable nation,” said Ed Golding, HUD principal deputy assistant secretary for housing.
“Using PACE, families will be able to make their homes more energy efficient and sustainable in the long run, while still keeping their costs affordable today,” Golding continued. “As PACE programs continue to develop across the nation, the positive impact on families, jobs, and the environment will only grow.”
According to HUD’s announcement, the FHA move on PACE liens is part of a larger effort by the Obama administration to “expand access to clean energy technologies to every American family with the option to transition to solar energy and make improvements to their homes to cut their energy bills.”
Per HUD’s announcement, the FHA will not accept a first lien PACE structure, except for past due amounts, as is the case for all tax assessments.
In accordance with existing guidance, HUD said that lenders will be responsible for escrowing PACE payments as they would property taxes. Additionally, purchasers of homes with existing PACE obligations will be responsible for any unpaid balance of the obligation.
According to HUD, this new guidance protects FHA from risk in a variety of ways. Lenders must escrow payments for PACE assessment so FHA should “never be at risk of losing collateral in a tax sale.”
Additionally, FHA is also protected as its appraisal policy requires that appraisals take into account the PACE assessment and the value of the improvements, HUD said.
According to HUD, to qualify for FHA insurance on mortgages for properties that include PACE assessments, lenders must determine that the following requirements have been met under the laws in the state where the property is located:
- The PACE obligation must be collected (escrowed) and secured by the creditor in the same manner as a special assessment against the property.
- The PACE obligation cannot accelerate – namely, the entire amount of the obligation cannot become due in the event of delinquency after endorsement of the FHA-insured mortgage. The property may be subject to an enforceable claim or lien that is superior to the FHA-insured mortgage but only for the delinquent portion of the PACE obligation.
- There are no terms or conditions that limit the transfer of the property to a new homeowner.
- The existence of a PACE obligation on a property is readily apparent to mortgagees, appraisers, borrowers and other parties to an FHA-insured mortgage transaction, and information on PACE obligations must be readily available for review in the public records where the property is located.
- In the event of the sale, including a foreclosure sale, of the property with outstanding PACE financing, the PACE assessment remains with the property. In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished. Unless a payoff is negotiated, the buyer will assume the obligation and will be responsible for the payments on the outstanding PACE amount.
The news wasn’t all good though, according to the National Association of Realtors.
In a statement, NAR President Tom Salomone welcomed the announcement, but expressed concern about the fact that for delinquent PACE obligations or foreclosed properties, PACE loans will retain a first-lien position.
“Realtors support incentive-based financing programs that allow homeowners to improve the energy efficiency of their homes and reduce their energy costs,” Salomone said in a statement.
“NAR is concerned that, by putting PACE loans in a primary lien position, fewer homeowners will be able to take advantage of the benefits of this program, and may also make it more difficult for distressed homeowners to refinance their mortgage outside of the FHA or VA,” Salomone continued.
“Should that happen, a foreclosed property with a PACE loan in the primary position will likely remain on the market longer than it should, further increasing uncertainty in mortgage markets and placing unnecessary pressure on homeowners,” Salomone added.
“We’re already experiencing tight lending standards that keep qualified buyers out of the market, and today’s announcement givens lenders another reason to withhold mortgage credit on otherwise desirable properties,” Salomone said.
“That will only make it harder for buyers to find affordable homes in a time of limited inventory and rising prices,” Salomone concluded. "NAR believes in the need to maintain and strengthen mortgage markets while supporting energy efficiency and lower utility costs, and we look forward to continuing that dialogue with FHA. We strongly urge FHA and VA to reconsider their policy and will work with our partners across the industry to make the case for changes.”