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HUD moves to officially revise FHA lien pecking order

Obama administration moves to curb super priority liens

[Update 1: Article updated with comments from David Stevens, president and CEO of the Mortgage Bankers Association]

Echoing similar calls late last year from the Federal Housing Finance Agency to preserve the first-lien status of loans guaranteed by Fannie Mae and Freddie Mac, the Department of Housing and Urban Development announced Monday that it intends to require liens created by energy retrofit programs to remain subordinate to loans guaranteed by the Federal Housing Administration.

In December, the FHFA issued the warning to homeowners, financial institutions and state authorities 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.

Now, the Obama administration 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 the 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.

According to HUD, PACE can vary from state-to-state, but typically allows homeowners to finance energy efficiency improvements for up to 20 years.

PACE allows homeowners to benefit from the improvements immediately and spread the cost over time. When the property is sold, the PACE loan remains with the property and the next owner is responsible for repaying the loan.

HUD said in its announcement that it fully supports PACE and similar programs, but said that its guidance will allow lenders to evaluate the conditions under which borrowers purchasing, refinancing properties, or modifying their loans with existing PACE assessments will be eligible to use FHA-insured financing.

HUD said that its guidance will require that PACE liens preserve the payment priority through subordination.

HUD also said that PACE assessments must be fixed-rate and carry a fixed repayment schedule.

Additionally, HUD said that PACE assessments must be recorded and identifiable to the lender and must be attached be attached to single-family properties, as defined by FHA, which are 1-to-4 unit dwellings.

HUD said that its guidance is “being informed” by ongoing conversations with the FHFA. HUD added that its final guidance will be issued in coordination with the FHFA, the Consumer Financial Protection Bureau, the Department of the Treasury, and other industry stakeholders.

The PACE guidance is a welcome development, according to Chris Polychron, the president of the National Association of Realtors.

“NAR is pleased that FHA took steps today to recommend that PACE loans remain in a subordinate position to the primary mortgage loan,” Polychron said.

“We are encouraged that FHA is clarifying their treatment of PACE loans as we examine their upcoming guidance,” he added. “NAR strongly believes in the need to maintain and strengthen mortgage markets while supporting energy efficiency through the PACE program, and we look forward to continuing that dialogue with FHA.”

David Stevens, the president and CEO of the Mortgage Bankers Association, also welcomed the news.

“MBA applauds the announcement today that supports efforts to promote renewable energy solutions for FHA insured homes, but protects the lien priority and lien rights of the first mortgage,” Stevens said. “This modification should allow some homeowners to install energy improvements in their home but not impede the rights of the first lien, something the original PACE program failed to consider."

Additionally, HUD announced that announced a new partnership with the Department of Energy that will incorporate the use of DOE’s Home Energy Score into Single Family existing FHA’s Energy Efficient Home program.

Under the new partnership, the FHA will provide “flexible underwriting” to recognize the reduced costs of utilities when those costs are established with the Department of Energy’s Home Energy Score, which the DOE developed as a method to estimate a home’s energy use.

According to HUD, the Home Energy Score is the equivalent of a vehicle miles-per-gallon rating for homes. The calculation methodology relies on a 10-point scale in which a “1” corresponds to the least energy efficient homes and a “10” corresponds to the most energy efficient homes.

According to DOE, the average U.S. home will score a “5.”

Under the partnership between HUD and DOE, homebuyers or homeowners who want to obtain an FHA-insured purchase or refinance mortgage for a single-family home that receives a Home Energy Score of 6 or higher will be eligible to increase their income qualifying ratio by 2% above the standard single-family FHA limit.

“These new tools will help homeowners make smart choices for their pocketbooks and for the environment,” said HUD Secretary Julián Castro. “HUD and the Obama Administration are proud to invest in American families and in the future of our planet.”

The full HUD announcement and copy of the proposed guidance can be read here.

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