PACE lenders downplay FHA's reversal on lien priority
When the Department of Housing and Urban Development endorsed Property Assessed Clean Energy last year, the move was seen as a largely symbolic; relatively few borrowers who apply for mortgages insured by the Federal Housing Administration qualify for this kind of financing.
Moreover, many mortgage lenders oppose PACE, which creates a lien on a property senior to that of a first mortgage, and were loathe to take advantage policy.
So there were few rumblings among PACE providers last week when HUD reversed the short-lived guidance.
Market-leading issuer Renovate America issued a statement noting “the impact of this policy change is to remove a transferability option for buyers, sellers, and those refinancing that has been used by just under 3,000 homeowners with Renovate America PACE assessments, or less than 2.7% of our pool.”
The about-face puts the FHA policy back in line with that of the Federal Home Finance Agency, which prohibits Fannie Mae and Freddie Mac from guaranteeing PACE-encumbered mortgages.
The FHA ban on approving PACE-encumbered homes would go into effect in January. Until then, homeowners who quality can continue to purchase or refinance mortgages on residential properties without having to prepay the entire PACE lien.
“The FHA decision simply mirrors existing FHFA policy adopted in 2010 — which did not deter the emergence and growth of the PACE market,” said Mike Lemyre, senior vice president of government affairs for Ygrene Energy Fund. “An important distinction in this case...is that one of the most popular FHA mortgage products is a 96.5% loan. These homeowners would not qualify for PACE anyway," due to a lack of equity.
“While we are disappointed with FHA’s decision, we remain encouraged by the hundreds of thousands of Americans who continue to recognize PACE as a valuable tool to protect their homes,” Lemyre said, in an emailed statement.
Another PACE provider, Renew Financial, also called the move "disappointing," saying "creates an additional barrier to some Americans seeking home improvements."
Renew disputed the FHA's justification for its decision, saying "there is no credible evidence that PACE financing creates additional risk of homeowner default." It noted that, in California, the nation’s largest PACE market, a loss-reserve fund was established with $10 million in 2013, to protect mortgage lenders from losses related to home mortgage defaults on properties with PACE liens; no claims have ever been filed against the reserve.
"In addition, the insurance industry in Florida recognizes the value of PACE-financed hurricane-mitigation measures by offering lower insurance premiums to those who make their homes more secure," Renew said in its statement.
The PACE industry relies heavily on securitization for financing, but the impact of the FHA's policy reversal on bonds backed by PACE assessments is likely to be limited, according to Lain Gutierrez, an analyst at DBRS. To date, Renovate America, Ygrene, Renew and others have securitized over $4 billion.
The policy could speed up prepayment rates on some existing deals, the analyst said, since sellers and buyers would have to clear a PACE lien to secure an FHA mortgage. But, again, that would be to a “limited degree due to FHA’s market share.”
The HUD announcement Thursday cited concerns over taxpayer risk on mortgages that could be superseded by PACE claims. HUD Secretary Ben Carson said in a release the “FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default.
“Assessments such as these are potentially dangerous for our [FHA] Mutual Mortgage Insurance Fund and may have serious consequences on a consumer’s ability to repay, or when they attempt to refinance their mortgage or sell their home,” he added.
By comparison, the 2016 guidance endorsing PACE, which was made under former FHA head Ed Golding, cited encouraging green-energy upgrades.
It was part of a larger effort under the former Obama administration to expand access to clean energy technologies to more American families. The policy only recognized the first-lien status for claims against past-due amounts on PACE assessments — as with any property tax levy. It drew the line at allowing the full balance of PACE liens to be collectible upon a default (which none are, according to ratings agency report) and also established requirements for lenders to collect for the semi-annual assessments in escrow accounts.
The news is not all bad on the regulatory front. The financial regulatory reform bill in the U.S. Senate would allow PACE financing to be overseen by the Consumer Financial Protection Bureau — rather than be subject to stricter Dodd-Frank mortgage disclosure and truth-in-lending regulations that many in the industry believed would have pushed local governments out of partnering with PACE programs.
If passed, the bill would enable the CFPB to create federal consumer protection laws similar to landmark rules going into effect at the state level in California.