The Federal Housing Administration and the Department of Veterans Affairs have issued new guidelines that permit the agencies to insure or guaranty mortgages on properties which are encumbered by Property Assessed Clean Energy liens, otherwise known as PACE loans. But Fannie Mae and Freddie Mac are still refusing to buy such loans.
PACE programs vary from state to state. But generally, they allow owners to finance most energy improvements to their homes. They are available in any state that has adopted specific legislation that allows local governments to fund the cost of solar panels, geothermal heating and cooling and other energy-saving betterments.
Borrowers don’t repay PACE loans to the party providing the funding. Rather, they pay for the improvements via higher tax assessments in the same manner as any special assessment is collected by the local government. And that’s the rub.
Since the PACE obligation is a lien against the property, the obligation for any outstanding balance travels to the new owner when the house is sold. And in the event of a foreclosure, the outstanding balance must be paid before the foreclosing lender can collect its due.
Until now, FHA regulations have required, in part, that with certain exceptions, at the time the mortgage is offered for insurance, the property must be free and clear of any liens other than the FHA-insured mortgage. The rules also have required that “any restrictions on conveyance automatically terminate if title to the mortgaged property is transferred by foreclosure or deed-in-lieu of foreclosure.”
The new FHA and VA rules are intended to address mortgage underwriting and consumer disclosure issues that lenders have had pertaining to PACE liens, as well as concerns that their priority over mortgages impair first and second mortgage lenders’ ability to recover what is owed in the event of a foreclosure.
According to Mortgagee Letter 2016-11 from the FHA, PACE assessments cannot have a superior lien status ahead of FHA-insured mortgages. But at the same time, the letter says PACE loans may retain their superior status in situations where the PACE payments are delinquent. However, even though that status can be waived or relinquished under the FHA rules, the Federal Housing Finance Agency, Fannie and Freddie’s conservator, still prohibits the two government sponsored enterprises from having anything to do with PACE liens because they can become clouds on the titles to the underlying collateral.
“While FHFA fully supports energy retrofit financing programs to allow homeowners to improve energy efficiency, these programs must be structured to ensure protection of the core financing for the home and, therefore, cannot undermine the first-lien status of Fannie Mae and Freddie Mac mortgages,” the GSEs’ regulator said in a statement explaining its position.
“This restriction has two potential implications for borrowers. First, a home owner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage. Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase. These restrictions may reduce the marketability of the house or require the homeowner to pay off the PACE loan before selling the house.”
(It also should be noted that the GSEs have their own programs that allow borrowers to roll the cost of most energy efficient improvements into the mortgage amount. These so-called energy efficiency loans have proven to be anything but efficient, though, as most lenders don’t want anything to do with them because of the red tape that is involved in underwriting them.)
The various housing organizations have voiced concerns about the new FHA-VA rules.
Mortgage Bankers Association Senior Vice President Pete Mills said that while his group supports energy efficiency, “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.”
The MBA also is worried that “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.”
Meanwhile, California Gov. Jerry Brown called out Fannie and Freddie for not participating in PACE programs during a White House briefing in early August. “They’re stubborn, they’re unreasonable, they’re acting like East Coast bankers,” the California governor said. Brown also pointed out that energy improvements raise values and praised the FHA and VA for “doing what Fannie and Freddie say you can’t do.” Some 70,000 home owners in the Golden State currently participate in the state’s PACE program.
According to an FHA summary of the new rules, properties which remain encumbered by a PACE obligation may be eligible for FHA-insured mortgage financing, as long as the lender meets these requirements:
- The PACE obligation is collected and secured by the creditor under state law in the same manner as a special assessment against the property.
- The property may become subject to an enforceable claim (a lien) that is superior to the FHA-insured mortgage only for delinquent regularly scheduled PACE special assessment payments. The claim cannot be enforceable for the full outstanding PACE obligation at any time through acceleration.
- There are no terms or conditions that limit the transfer of the property to a new homeowner such as those that require third-party consent before conveyance. – unless the owner can terminate that provision at his option and without cost.
- The PACE obligation’s existence must be readily apparent to mortgagees, appraisers, borrowers and other parties to an FHA insured mortgage in the public records and must show the obligation amount, the expiration date and cause of the expiration of the assessment. In no case may default accelerate the expiration date.
- In the event of the sale, including a foreclosure sale, the obligation will continue with the property, making the new owner responsible for the payments on the outstanding PACE balance.
- A sales contract must disclose the PACE obligation and that it will remain with the property or that it will be satisfied by the seller prior to closing.
This article was written exclusively for GoRion.