Last month, the Department of Housing and Urban Development and the Federal Housing Administration announced that the FHA 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.
But the housing industry’s biggest trade groups are concerned with the details of the FHA’s new rules surrounding loans created by the Property Assessed Clean Energy program, also called PACE loans.
Through the PACE program, homeowners can obtain financing to make improvements to their homes to increase the home’s energy efficiency.
And the FHA’s new PACE rules state the FHA will now approve purchase and refinance mortgage applications in states that treat PACE obligations as special assessments similar to property taxes.
But that arrangement has the Mortgage Bankers Association, the National Association of Realtors, the Appraisal Institute, and several other large trade groups worry about the potential for PACE loans to be given super priority loan status, despite the FHA’s rules being designed to avoid that specific issue.
“The guidance issued for the FHA and by the VA on July 19, 2016 now allows for the approval of mortgages for the purchase or refinance of properties with PACE obligations, provided they meet certain requirements,” the trade groups write in a letter addressed to HUD and the Department of Veterans Affairs.
“Among the requirements in the new guidance is the stipulation that the outstanding PACE loan obligation does not take first lien position ahead of the FHA-insured or VA-guaranteed mortgage,” the groups continue.
“However, the guidance does provide that delinquent PACE loan amounts will retain a first lien position,” the groups state. “Allowing any PACE loan amount to hold a senior priority undermines the lender’s (and the government’s) collateral position and disrupts the very nature of secured lending.”
The groups, which also include the American Bankers Association, the American Land Title Association, the Credit Union National Association, the Housing Policy Council of the Financial Services Roundtable, the Independent Community Bankers of America, the National Association of Federal Credit Unions, the Real Estate Services Providers Council, and the Realty Alliance, state that the language of the new rule isn’t strong enough.
“Rather than requiring definitive subordination of the PACE loan to the FHA or VA mortgage, the new guidance simply declares that a PACE loan structured as a tax assessment is not a super lien,” the groups state. “But this declaration is a form over substance evasion that fails to protect the FHA Mutual Mortgage Insurance Fund and the VA loan guaranty program.”
Additionally, the groups state the FHA’s new rules put consumers at more risk than they need to be.
“Furthermore, the July 19th guidance raises a host of serious consumer protection concerns,” the groups state. “PACE loans are not typically accompanied by federal Consumer Financial Protection Bureau disclosures and protections associated with home mortgages, including the new Know Before You Owe disclosures, right of rescission protections, or the Ability to Repay standards.”
This, according to the groups, is because PACE loans have been “conveniently classified” as a tax assessment instead of as a loan.
“However, a PACE loan is still a financial obligation that can negatively affect one’s mortgage repayment ability,” the groups state.
“Borrowers may not fully understand the consequences of assuming an increased financial obligation on their tax bill. These borrowers also may not be able to effectively compare the cost of a PACE loan to that of more conventional financing—which typically is available at a significantly lower interest rate, with CFPB disclosures,” the groups continue. “Consequently, the existing PACE dynamics heighten the risk of borrower delinquency, which could lead both FHA and VA to incur higher defaults and loss severities than if PACE loans were required to be properly underwritten and subordinate to the first mortgage in the event of foreclosure.”
The groups also state that they are concerned with the fact that the PACE loan “run with property,” meaning the loan stays with the property even after it’s sold because it can impact the potential sale of the property.
“Real estate professionals report that many subsequent purchasers of these homes reject the presence of a PACE payment obligation and insist that the seller extinguish the PACE financing before consummating the purchase,” the groups state. “This leaves the original borrowers with a closing table surprise and far less in sale proceeds than they anticipated. The presence of the PACE obligation may also negatively impact home values, especially in foreclosure situations.”
The groups go on to urge the FHA and the VA to reconsider the current rules and consider industry feedback before moving forward.
“We urge you to suspend the applicability of the proposed FHA and VA PACE guidelines and issue the proposal for notice and comment so that lenders, borrowers, home improvement providers, and others may be given the opportunity to comment and assist the Departments in establishing policies that better protect consumers, lenders, and taxpayers,” the groups conclude.