MBA Analysis of New PACE Guidelines: ‘Risks for FHA, Lenders & Servicers’
The Mortgage Bankers Association issued an analysis of new FHA guidelines for Property Assessed Clean Energy programs, saying that allowing FHA financing for purchasing or refinancing properties with energy-related home improvements raises new questions about lack of consumer protections and increased risks to FHA’s insurance programs.
“While MBA believes that energy efficient home improvements can be beneficial for homeowners, we have had significant concerns for years about PACE programs in general,” said Pete Mills, MBA senior vice president of residential policy and member engagement, in a letter to MBA members. “Unfortunately, FHA’s new PACE guidance does little to ameliorate those concerns and raises important new questions about the lack of consumer protections, increased risks to the FHA’s Mutual Mortgage Insurance Fund, and significant compliance and indemnification risks for lenders and servicers.”
Last week, FHA issued Mortgagee Letter 2016-11 (http://portal.hud.gov/hudportal/documents/huddoc?id=16-11ml.pdf), which, for the first time, permits FHA financing to be used to purchase or refinance properties with energy-related home improvements that have been financed using the PACE program. The VA issued similar guidance via Circular 26-16-18 (http://www.benefits.va.gov/homeloans/resources_circulars.asp). P
ACE programs are used by home improvement contractors in conjunction with state and local governments to finance a wide variety of energy and water efficiency improvements on residential properties.
In its analysis (http://mba.informz.net/MBA/data/images/MBA Summary of FHA PACE Bulletin Final.pdf), MBA cited several concerns, including:
–The FHA guidance framework exposes lenders to both indemnification and False Claims Act risk;
–MBA is concerned that mortgage servicers will be required to advance PACE loan payments (like what is done with property taxes and insurance) in the event a borrower neglects payment, becomes delinquent or the property enters foreclosure. “Thus, FHA will be requiring servicers to collect/advance payment for the private companies originating PACE loans. The effect is a near-guarantee of payment for PACE loans, at the expense of servicer labor/liquidity,” MBA said.
–The guidance could present “serious dangers” to the healthy/solvency of the FHA Mutual Mortgage Insurance Fund, which, in recent years, has fallen below its congressionally mandated 2 percent capital reserve requirement. “Where the servicer has advanced PACE loan payments for the borrower (borrower neglects payment, becomes delinquent, or the property enters the foreclosure process), servicer reimbursement will come at the expense of the MMIF,” MBA said.
–FHA’s recovery value on foreclosed properties may be impaired, given that buyers may avoid purchasing properties with long-term, outstanding PACE obligations still encumbering the property.
–While appraisers are required by FHA’s guidance to analyze and report the impact of PACE energy improvements on the value of the property, there is a risk that improvements or cost savings may be overvalued.
–With the outstanding PACE loan obligation running with the property, borrowers who later sell may find themselves having to pay off the outstanding PACE loan per buyer demand, or agreeing to a lower sales price. In some cases these borrowers may find themselves underwater, which could precipitate a default and a claim on the MMIF.
“Over time, there is significant risk that the MMIF will bear financial losses from FHA’s PACE guidance as the Fund will now serve as a ‘backstop’ for these privately originated home improvement loans,” MBA said.
Additionally, MBA said PACE loans are not typically accompanied by disclosures associated with real estate financing, because PACE financing is not officially classified as a “loan,” but as an assessment. “However, a PACE loan is still a financial obligation that can negatively affect one’s mortgage repayment ability,” MBA said. “Borrowers may not fully understand the consequences of assuming an increased financial obligation on their tax bill. These borrowers also may not be able to effectively compare the cost of a PACE loan to that of more conventional financing.”
FHA’s announcement of a contrary policy will only lead to confusion/unanticipated restrictions for consumers seeking to move from an FHA product to a GSE product, or vice versa.
“MBA has been raising these concerns with FHA for several months and has urged both HUD and OMB to engage with the industry to address these issues,” Mills said.
Recently, MBA sent a letter urging the Consumer Financial Protection Bureau to intervene on the significant consumer protection issues (http://mba.informz.net/MBA/data/images/PACE Letter CFPB FINAL.pdf).
“We will continue to urge FHA to slow implementation and engage with the industry and consumer groups to address many of the problematic aspects of FHA’s PACE guidance,” Mills said. “In the meantime, we urge our members to proceed very cautiously and carefully and review the consumer and lender risks before participating. We also urge members to evaluate alternative means to help consumers finance energy efficient improvements that better protect consumers and lower costs, including existing home equity products and recent energy efficiency products released by Fannie Mae and Freddie Mac.”
