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FHA Issues PACE Assessment Guidance

Phil Hall
Jul 19, 2016
Can a commercial property’s energy efficiency (or lack thereof) play a role in its loan default probability

The Federal Housing Administration (FHA) has waded into the green tech environment by announcing a guidance that will enable it to insure mortgages on properties that include Property Assessed Clean Energy (PACE) assessments as an obligation similar to property taxes.

The PACE concept finances lending to cover energy-efficiency installations, and the loans are paid back through incremental property tax increases. The concept’s popularity was jeopardized in 2010 when the Federal Housing Finance Agency (FHFA) ordered Fannie Mae and Freddie Mac to avoid mortgages for borrowers using PACE loans on their properties; an attempt by the state of California to overturn the FHFA’s ruling in court did not succeed.

The FHA is not able to accept a first lien PACE structure, so lenders remain responsible for escrowing PACE payments as they would property taxes. Homebuyers also carry the costs of unpaid balances of any pre-existing PACE obligation.

The new guidance tries to achieve a balance that encourages PACE lending while protecting the FHA from several risks, including the loss of collateral in a tax sale. FHA’s appraisal policy will also be protected because appraisals will factor in the PACE assessment and the value of the improvements. In the event of a home sale with outstanding PACE financing, the PACE assessment will remain with the property—although in foreclosure sales, priority collection of delinquent payments for the PACE assessment may be waived or relinquished.

"Today, we're seizing the opportunity to shape a cleaner and more sustainable nation," said Ed Golding, HUD’s principal deputy assistant secretary for housing. "Using PACE, families will be able to make their homes more energy-efficient and sustainable in the long run, while still keeping their costs affordable today. As PACE programs continue to develop across the nation, the positive impact on families, jobs, and the environment will only grow."

The FHA’s announcement was met with a degree of disappointment by the Mortgage Bankers Association (MBA).

“MBA and its members believe that energy-efficient home improvements provide homeowners with a wide variety of benefits, and want to help homeowners safely and sustainably finance these kinds of improvements,” said Pete Mills, senior vice president of residential policy and member engagement at the MBA. “However, we are concerned that this program, as designed, would leave low and moderate income FHA borrowers more vulnerable to being misled and steered into financial obligations that they may not fully understand due to lack of disclosure.  Further, the program puts taxpayers at risk by effectively making the FHA the guarantor of home improvement loans made by private contractors, thus increasing loss severity for the FHA program if borrowers default. Alternative means to finance energy efficient improvements already exist that don’t pose the same risks to consumers and taxpayers.”

Mills added that the FHA should seek out comment from industry stakeholders in order “to refine their program to better serve and protect consumers and the taxpayers.”

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