The Department of Veterans Affairs has clarified its requirements on mortgages that are subject to Property Assessed Clean Energy obligations.
PACE programs
provide an alternative means of financing clean energy, energy efficiency and resilience improvements to residential properties.
Improvements are financed from
private enterprises in conjunction with state and local governments and repaid through government assessments.
Circular 26-16-18 describes how a VA-guaranteed loan can be made on a property that is encumbered by a PACE obligation.
The circular said that laws in the state where the property is located must require the PACE obligation to be
collected and secured by the creditor the same way as a special assessment against the property.
If the property is subject to the full PACE obligation, then it cannot be
subject to an enforceable claim that is superior to the VA loan at any time.
“The property may, however, be subject to an enforceable claim (i.e., a lien) that is superior to the VA-guaranteed loan for delinquent regularly scheduled PACE special assessments,” the notice stated.
VA noted that transfer of the property with a PACE obligation to a new homeowner cannot be limited. Any restrictions on conveyance from a PACE obligation that could require third-party consent is prohibited. An exception would be when such
provisions can be terminated by the owner at no cost.
The agency explained that the existence of a PACE obligation must be readily apparent to anyone involved in a VA loan transaction. The obligation must be readily available for review in public records.
If there is a PACE obligation on an existing property that does not meet VA PACE requirements, the obligation must be satisfied at closing.
Appraisers are required to analyze PACE improvements when a PACE obligation will remain outstanding.
The Federal Housing Administration also announced it will allow FHA lending on properties with PACE obligations.
However, FHA is requiring lenders to escrow for PACE payments, whereas VA seems to be providing a little more leeway.
“If the lender requires a borrower to escrow funds to ensure the PACE obligation is paid timely, the lender must open and manage the escrow accounts in a manner consistent with federal, state and local law,” the VA circular said.
The Mortgage Bankers Association issued a statement indicating concern about FHA lending on PACE-encumbered properties.
“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,” MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills said in a written statement. “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.”
Mills added that other sources of financing are available for energy efficient improvements that don’t pose risks to consumers and taxpayers.
