The Federal Housing Administration (FHA) released lender guidance spelling out the circumstances under which it will insure mortgages on properties encumbered by Property Assessed Clean Energy liens similar to tax assessments.
PACE financing has been a point of contention between mortgage lenders and the municipalities and private companies that make them. Both kinds of lenders have claim on the same collateral — the borrower's homes.
The programs are currently available in California and Florida and will soon be available in other states, including Missouri and Colorado. But they have been under a cloud since 2010, when the Federal Housing Finance Agency (FHFA) ordered Fannie Mae and Freddie Mac to stop acquiring mortgages on homes with PACE liens.
The FHA’s guidance addresses PACE programs where the obligation is treated like a property tax. That means the full obligation does not have priority of an FHA mortgage lien, and it does not have to be paid in full when a property is refinanced or changes hands. But delinquent obligations or obligations on foreclosed properties will retain a first-lien position. By law, the FHA cannot accept a first-lien PACE structure. So lenders will be responsible for escrowing PACE payments as they would property taxes. In addition, purchasers of homes with existing PACE obligations will be responsible for any unpaid balance of the obligation.
Renovate America and Renew Financial, two administrators of PACE programs, hailed the guidance as the first federal housing policy that specifically endorses PACE. "In saying PACE should be treated as any other property tax assessment and not as a traditional loan product, the FHA gives much greater clarity to state and local governments,” said Renovate America CEO J.P. McNeill.
The guidance does not sit well with mortgage industry participants, however. The National Association of Realtors is concerned that putting PACE loans in a primary lien position will make it more difficult for distressed homeowners to refinance their mortgage outside of the FHA or the VA. “Should that happen, a foreclosed property with a PACE loan in the primary position will likely remain on the market longer than it should, further increasing uncertainty in mortgage markets and placing unnecessary pressure on homeowners,” NAR President Tom Salomone said in an emailed statement.
“We’re already experiencing tight lending standards that keep qualified buyers out of the market, and today’s announcement givens lenders another reason to withhold mortgage credit on otherwise desirable properties,” Salomone said. “That will only make it harder for buyers to find affordable homes in a time of limited inventory and rising prices.”
The Mortgage Bankers Association is also urging the FHA to amend its guidance, citing the potential for low and moderate income borrowers to be misled and steered into financial obligations they might not understand.
Pete Mills, the trade group’s senior vice president of residential policy and member engagement, said the program puts taxpayers at risk by effectively making the FHA the guarantor of home improvement loans made by private contractors.