MBA, Trade Groups Cite Concerns over PACE Loans
The Mortgage Bankers Association and other industry trade groups, in a letter to federal agencies, said proposed changes to policy regarding Property Assessed Clean Energy loans raise questions about lack of consumer protections and increased risks to FHA and VA insurance programs.
The letter urged HUD Secretary Julian Castro and VA Secretary Robert McDonald to suspend guidance issued by the agencies in July that allow financing for purchasing or refinancing properties with energy-related home improvements raises and instead issue a proposal for rulemaking and comment to establish better protections for lenders, agencies and consumers.
“Our associations support responsible efforts to provide homeowners with affordable and accessible financing for energy efficient home improvements, and sounder alternatives to the FHA’s and VA’s new PACE guidelines already exist,” the letter said.
Last month, 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).
Prior FHA and VA policy barred financing or refinancing of a home unless the property was free and clear of any liens other than the FHA-insured or VA-guaranteed mortgage. Because PACE obligations are collected through property tax payments, they exhibit a senior lien position to an FHA or VA loan. Thus, prior FHA and VA policy was designed to ensure that obligations like a PACE “super lien” would not erode the value of the collateral in the event of foreclosure or the sale of the property.
“Allowing any PACE loan amount to hold a senior priority undermines the lender’s (and the government’s) collateral position and disrupts the very nature of secured lending,” the MBA/trade group letter said. “Moreover, rather than requiring definitive subordination of the PACE loan to the FHA or VA mortgage, the new guidance simply declares that a PACE loan structured as a tax assessment is not a super lien. But this declaration is a form over substance evasion that fails to protect the FHA Mutual Mortgage Insurance Fund and the VA loan guaranty program.”
Furthermore, the letter points out the July 19 guidance raises a host of serious consumer protection concerns. “PACE loans are not typically accompanied by federal Consumer Financial Protection Bureau disclosures and protections associated with home mortgages, including the new Know Before You Owe disclosures, right of rescission protections or the Ability to Repay standards,” the letter said. “This is because PACE financing has been conveniently classified as a tax assessment rather than a loan. However, a PACE loan is still a financial obligation that can negatively affect one’s mortgage repayment ability. Borrowers may not fully understand the consequences of assuming an increased financial obligation on their tax bill.”
These borrowers, the letter said, also may not be able to effectively compare the cost of a PACE loan to that of more conventional financing, which typically is available at a significantly lower interest rate, with CFPB disclosures. “Consequently, the existing PACE dynamics heighten the risk of borrower delinquency, which could lead both FHA and VA to incur higher defaults and loss severities than if PACE loans were required to be properly underwritten and subordinate to the first mortgage in the event of foreclosure,” the letter said.
Last month, MBA issued an analysis (http://mba.informz.net/MBA/data/images/MBA Summary of FHA PACE Bulletin Final.pdf) of the new PACE guidelines, citing the above concerns.
Joining MBA in the letter: the American Bankers Association; the American Land Title Association; the Appraisal Institute; Credit Union National Association; the Housing Policy Council of the Financial Services Roundtable; Independent Community Bankers of America; National Association of Federal Credit Unions; National Association of Realtors; the Real Estate Services Providers Council; and The Realty Alliance.
