“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 default,” Dr. Ben Carson, secretary of the Housing and Urban Development, said in a statement announcing the agency’s decision to not insure residential mortgages with existing PACE loans.
PACE or Property Assessed Clean Energy is a type of loan that allows homeowners to make energy-efficient modifications to their homes. Last July 2016, the FHA said it can insure mortgages with PACE loans subject to their conditions.
But that decision has been reversed. Based on its December 7 announcement, the FHA said it will no longer insure mortgages with PACE loans. This will apply to new FHA loans made 30 calendar days since the Dec. 7 guideline.
FHA: PACE Loans “Potentially Dangerous”
The FHA in its public statement revealed as much that the decision was to keep its mutual mortgage insurance fund financially healthy. This fund supports FHA forward and reverse mortgages being made to first-time homeowners and senior borrowers, respectively.
While the MMI Fund has a capitalization ratio of 2.09% (above statutory requirements of 2%) and economic net worth of $25.6 billion as of FY 2017, these statistics were down from the previous fiscal year.
Dr. Carson pointed out, “Assessments such as these [PACE loans] 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.”
The FHA also took up the lack of transparency on how PACE loans are added to its existing insured mortgages, whose risks make it difficult for them to assess. Adding PACE loans per the FHA can bear risk to borrowers and potential violation of its loan terms.
PACE Loans in FHA Homes
PACE programs operate on a local or state level. According to PACENation,180,000 home upgrades worth $4.4 million have been funded between 2010 and 2017.
Eligible homeowners can access financing for otherwise costly energy improvements. They are typically repaid within 10 to 20 years.
The PACE assessment is collected on top of the property’s tax bill. Failure to pay this “energy bill” is tantamount to not paying a portion of the property taxes. Taxes generally must be repaid first before any other liens attached to the property, including first-lien FHA mortgages.
This super-priority status of PACE loans has led the Federal Housing Finance Agency to prohibit Fannie Mae or Freddie Mac from buying loans on homes with PACE assessments.
In its July 2016 guideline, the FHA clarified that it will insure loans with a PACE lien if the PACE obligation, among other things, is a special assessment and not an enforceable claim on the property securing the FHA mortgage.
The FHA believes that PACE assessments’ priority status could potentially lead to losses to the MMI Fund, according to its mortgagee letter 17-18.
NAR, MBA Applaud FHA’s Move
The National Association of Realtors (NAR) and Mortgage Bankers Association (MBA) were among the first industry trade groups to show their support for the FHA’s latest move.
NAR President Elizabeth Mendenhall applauded the decision in a press release. “FHA’s PACE announcement is a smart step that will protect taxpayers and strengthen the overall program for homebuyers. NAR supports voluntary, incentive-based programs that encourage owners to make their homes more energy efficient, but not at the expense of FHA or the strength of their portfolio.”
In another statement, David H Stevens, president and chief executive officer of MBA, said that the FHA’s stand aligns it with 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.”
Indeed, the FHA believes that consumer protections with respect to PACE originations are not as clear as with that of mortgage products.
In its mortgagee letter, the agency hinted at a future guidance on the extinguishment of PACE loans in the context of its insured mortgages.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.