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FHA to stop insuring mortgages with PACE loans

Trump administration reverses Obama policy

Last year, the Department of Housing and Urban Development announced, with much fanfare and controversy, that the Federal Housing Administration would begin insuring mortgages that also carry liens created by the Property Assessed Clean Energy program, also called PACE.

But that was last year. Things are much different now.

On Thursday, HUD announced that the Trump administration is reversing the Obama administration’s decision to insure FHA mortgages with PACE liens.

In 30 days, the FHA will stop insuring mortgages on homes that also carry PACE liens.

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.

But the FHA is concerned about the impact of the PACE liens.

“FHA is concerned about the potential for increased losses to the Mutual Mortgage Insurance Fund due to the priority lien status given to such assessments in the case of default,” FHA said in its letter to mortgagees.

“FHA is also concerned with the lack of consumer protections associated with the origination of the PACE assessment, which are far less comprehensive than that of traditional mortgage financing products,” FHA continued. “FHA’s involvement with accepting properties with PACE assessments may indirectly help to overshadow potential consumer abuses.”

In its announcement, HUD said part of the decision to reverse the Obama administration’s decision on PACE loans is to “protect the health” of the FHA’s flagship fund, the Mutual Mortgage Insurance Fund.

Last month, HUD announced that the key figure in the health of the MMI Fund, its capital ratio, remained above the Congressionally mandated threshold of 2%, but declined in fiscal 2017 from where it was last year.

“FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default,” HUD Secretary Ben Carson said. “Assessments such as these are potentially dangerous for our Mutual Mortgage Insurance Fund and may have serious consequences on a consumer’s ability to repay, or when they attempt to refinance their mortgage or sell their home.”

In its announcement, HUD also said that FHA is “very concerned” about the outstanding loans that carry PACE obligations.

“The post-endorsement placement of these assessments on an FHA-insured mortgage creates a lack of transparency making it difficult for the agency to understand the true nature of the risks involved,” HUD said in the announcement.  “In addition, such activity is risky for FHA borrowers and potentially violates the terms of their FHA-insured mortgage.”

The announcement stated that FHA “intends to monitor this carefully to determine whether further action is warranted” on the outstanding FHA loans with PACE liens.

The decision is a stark reversal from the Obama administration’s moves on PACE.

Under the Obama administration, HUD laid the groundwork for insuring FHA loans with PACE liens in 2015, when it announced its intentions to issue guidance that would preserve the priority status of FHA loans over liens created by energy retrofit programs.

Last year, when it announced the PACE changes, HUD said that 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.

The move was part 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.”

But, the Trump administration has other plans.

To read the FHA mortgagee letter on the PACE decision in full, click here.

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