Last year, several of the housing industry’s largest trade groups voiced concern over the Obama administration’s decision to allow the Federal Housing Administration to begin insuring mortgages that also carry liens created by the Property Assessed Clean Energy program, also called PACE.
A coalition of the groups, which included the Mortgage Bankers Association and the National Association of Realtors, asked FHA and the Department of Housing and Urban Development to reconsider the change.
On Thursday, the Trump administration reversed the Obama administration’s decision on PACE loans and said that FHA will stop insuring mortgages on homes that also carry PACE liens.
Unsurprisingly, the same groups that asked for a change to the PACE rules last year are in favor of the Trump administration’s decision.
“MBA applauds HUD’s announcement and fully supports these reforms. PACE liens pose a real danger to secured lenders and to the MMI fund because they erode the underlying collateral due to their priority lien position in the event of default,” MBA President and CEO David Stevens said in a statement.
“HUD’s actions today will help protect taxpayers and the FHA insurance fund, and will align FHA policy with that of Fannie Mae and Freddie Mac. However, consumers should still be very wary of these dangerous loans, which are not yet subject to important federal consumer protection laws,” Stevens continued.
“In addition, consumers need to understand that PACE loans can significantly hinder their ability to later sell their house,” Stevens added. “That is why we continue to support S. 2155, The Economic Growth, Regulatory Relief, and Consumer Protection Act, and its requirement that PACE loans comply with the same ability to repay requirements as other mortgage products.”
Stevens notes the FHA’s flagship fund, the Mutual Mortgage Insurance Fund, which factored into the Trump administration’s decision.
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 MMI 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 of the PACE announcement. “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.”
Elizabeth Mendenhall, the president of the National Association of Realtors, also noted the risk to the MMI Fund posed by PACE liens.
“FHA’s PACE announcement is a smart step that will protect taxpayers and strengthen the overall program for homebuyers,” Mendenhall said. “NAR supports voluntary, incentive-based programs that encourage homeowners to make their property more energy efficient, but not at the expense of FHA or the strength of its portfolio. NAR pushed hard for this change and we applaud FHA’s attention to the issue.”
The California Association of Realtors also welcomed the change to the PACE rules.
“The California Assn. of Realtors was opposed to FHA financing on homes with PACE loans that are senior to the first mortgage,” C.A.R. President Steve White said in a statement. “C.A.R. supports this change that aligns FHA’s policy with Fannie Mae and Freddie Mac’s so there will be no confusion in the marketplace.”
Renovate America, which provides PACE loans, suggests that the FHA change may have limited impact on the growing PACE market.
“Since 2010, the controlling federal housing finance guidance on Property Assessed Clean Energy has been from the FHFA, which prohibits Fannie Mae and Freddie Mac from insuring mortgages with existing PACE assessments. That’s why PACE providers have disclosed to homeowners that they may need to pay off their PACE assessment when they sell or refinance, as they would with any property-secured financing,” Renovate America Chief Strategy Officer Ari Matusiak said.
“In that respect, the impact of this policy change is to remove a transferability option for buyers, sellers, and those refinancing that has been used by just under 3,000 homeowners with Renovate America PACE assessments, or less than 2.7% of our pool,” Matusiak said. “Residential PACE continues to grow in origination volume and into new markets, and its success in promoting energy efficiency and renewable energy adoption has been well-documented.”