The Department of Housing and Urban Development has followed through on a plan to allow government-insured loans on properties with energy efficient improvement liens.
HUD’s plan involves residential loans that are insured by the
Federal Housing Administration and utilized to finance houses that have Property Assessed Clean Energy loans.
PACE loans are used by homeowners seeking clean energy technologies for their residences. Improvement costs are paid through an assessment added to the property’s tax bill.
Concern about lien priority
prompted Fannie Mae’s and Freddie Mac’s regulator, the Federal Housing Finance Agency, to direct the two firms in July 2010 not to buy loans on PACE-encumbered properties.
But HUD has maintained an open mind about FHA lending on PACE-encumbered properties.
In August 2015, the agency
announced that FHA intended to issue a set of guidelines supporting borrowers who want to make energy efficient improvements to their homes.
On Tuesday, FHA issued Mortgagee Letter 2016-11 providing guidance on making loans on properties that include PACE assessments.
“FHA will now approve purchase and refinance mortgage applications in states that treat PACE obligations as special assessments similar to property taxes,”
HUD said in an accompanying announcement.
Such states treat the PACE obligation
like a property tax and does not allow the full obligation to have priority or ‘prime’ status over the FHA-insured mortgage lien.
“By law, FHA cannot accept a first lien PACE structure (except for past due amounts as is the case for all tax assessments),” the statement said.
When making an FHA mortgage with a PACE obligation, lenders will be required to escrow for PACE payments just like they would for property taxes.
PACE obligations can’t accelerate as a result of default after FHA insures a mortgages, and no terms or conditions can exist that would limit the transfer of the property to a new homeowner.
HUD explained that the existence of a PACE obligation needs to
be readily apparent to mortgagees, appraisers, borrowers and other parties to an FHA-insured mortgage transaction.
Home buyers on properties with PACE obligations will
be responsible for any unpaid balance of the obligation.
“In the event of the sale, including a foreclosure sale, of the property with outstanding PACE financing, the PACE assessment remains with the property,” the notice said.
“In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished.”
HUD noted that PACE
is a promising, effective way to finance energy efficiency, renewable energy and water conservation. It is also helping with other resilience upgrades to homes like new heating and cooling systems, lighting improvements and solar panels as well as water pumps and insulation.
“The guidance protects FHA from risk in a variety of ways,” HUD said. “Lenders must escrow payments for PACE assessment so FHA should never be at risk of losing collateral in a tax sale. FHA is also protected as its appraisal policy requires that appraisals take into account the PACE assessment and the value of the improvements.”
