FHA to Halt Insuring Mortgages on Homes with PACE Assessments
The Federal Housing Administration last week rescinded a short-lived policy and will no longer insure new mortgages on properties that include Property Assessed Clean Energy (PACE) assessments.
In Mortgagee Letter 2017-18 (https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf), FHA said the decision reversing the policy, first enacted in July 2016, is part of a larger effort to protect the health of its Single-Family Mutual Mortgage Insurance Fund. Last month, FHA released its annual actuarial report on the fiscal health of the MMIF, finding the Fund had a total economic net worth of $25.6 billion and the Capital Ratio that remains above the statutory minimum for a third straight year.
“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,” said HUD Secretary Ben Carson. “Assessments such as these are potentially dangerous for our 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.”
The Mortgage Bankers Association has long-expressed concerns with PACE loans. MBA said while energy efficient home improvements can be beneficial for homeowners, significant concerns exist when these improvements are financed with PACE loans, a financing structure it said lacks vital consumer protections and presents lien priority risks to lenders, investors and guarantors. MBA President and CEO David H. Stevens, CMB, issued a statement commending HUD in support of these reforms.
“PACE liens pose a real danger to secured lenders and to the MMI fund because they erode the underlying collateral due to their priority lien position in the event of default,” Stevens said. “HUD’s actions today will help protect taxpayers and the FHA insurance fund, and will align FHA policy with that of Fannie Mae and Freddie Mac.”
Stevens cautioned, however, that consumers should still be “very wary of these dangerous loans,” which are not yet subject to important federal consumer protection laws.
“In addition, consumers need to understand that PACE loans can significantly hinder their ability to later sell their house,” Stevens said. “That is why we continue to support S. 2155, The Economic Growth, Regulatory Relief, and Consumer Protection Act, and its requirement that PACE loans comply with the same ability to repay requirements as other mortgage products.”Carson said FHA is also very concerned about PACE obligations being placed on FHA-insured mortgages that are already outstanding.
“The post-endorsement placement of these assessments on an FHA-insured mortgage creates a lack of transparency making it difficult for the agency to understand the true nature of the risks involved,” HUD said. “In addition, such activity is risky for FHA borrowers and potentially violates the terms of their FHA-insured mortgage. FHA intends to monitor this carefully to determine whether further action is warranted.”
