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FHA eyeing further action on mortgages with PACE liens

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So far, the Federal Housing Administration's opposition to financing energy efficiency retrofits through property assessments has focused on mortgage originators. The agency no longer insures mortgages on homes with existing Property Assessed Clean Energy liens.

It has yet to take action when a homeowner with an existing FHA-insured mortgage obtains PACE financing.

Dana Wade, the FHA’s acting commissioner and deputy assistant secretary, suggested that this could change. In an address Tuesday at the Structured Finance Industry Group’s annual conference in Las Vegas, Wade said the agency is looking into whether “further action” is needed.

“PACE obligations were effectively given prime status over FHA mortgage insurance, [and] such loans were riskier for both taxpayers and borrowers,” Wade said. “There do remain concerns over PACE assessments that are placed on FHA loans after endorsement.”

In December, the Department of Housing and Urban Development announced that the FHA would no longer insure mortgages with such priority-lien assessments — a policy reversal engineered by HUD Secretary Ben Carson against an Obama-era policy.

The Dec. 7 change by the FHA only affected new mortgages, but an FHA release stated that Carson and other executives remained “concerned” about PACE liens on outstanding FHA mortgages.

Wade did not outline possible actions the agency might take, but said it will continue to “watch this practice vigilantly to determine whether further action is warranted.”

Housing regulators aren't the only detractors. PACE liens are controversial among lenders, who dislike taking a back seat in terms of payment priority. And many real estate agents feel that homes encumbered by PACE liens can take longer to sell. That's because the lien does not "travel" with the homeowner; rather, the buyer inherits it. But some homeowners have been compelled to repay PACE liens in order to sell their property.

The FHA's about-face puts it back in line with Freddie Mac and Fannie Mae, which also refuse to underwrite new mortgages with PACE assessments — forcing homebuyers to satisfy the lien through prepayment to obtain a loan compliant with Freddie/Fannie standards.

PACE industry officials have dismissed the HUD’s decision as largely ineffectual, since few homeowners taking out low-down-payment FHA mortgages have the equity level to meet PACE underwriting standards. Renovate America, the leading PACE financing provider in California, stated at the time of HUD’s announcement that FHA-sponsored loans were less than 2.7% of its pool of borrowers.

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