FHA to Insure Mortgages with PACE Loans | Practical Law

FHA to Insure Mortgages with PACE Loans | Practical Law

The Federal Housing Authority (FHA) recently announced final guidance to explain the circumstances under which residential properties under a Property Assessed Clean Energy (PACE) assessment could be eligible for a FHA mortgage loan. This guidance went into effect on September 17, 2016.

FHA to Insure Mortgages with PACE Loans

Practical Law Legal Update w-003-1818 (Approx. 3 pages)

FHA to Insure Mortgages with PACE Loans

by Practical Law Real Estate
Published on 23 Sep 2016 • USA (National/Federal)
The Federal Housing Authority (FHA) recently announced final guidance to explain the circumstances under which residential properties under a Property Assessed Clean Energy (PACE) assessment could be eligible for a FHA mortgage loan. This guidance went into effect on September 17, 2016.
The Federal Housing Authority (FHA) released on July 19, 2016 a mortgagee letter that specifically permitted and explained the circumstances under which residential properties under a Property Assessed Clean Energy (PACE) assessment could be eligible for a Federal Housing Authority (FHA) insured mortgage loan. This guidance went into effect on September 17, 2016.

Mortgagee Letter

The FHA issued Mortgagee Letter 2016-11 as part of an effort on behalf of the White House to encourage energy efficiency by expanding the accessibility of clean energy financing options. PACE loans support renewable energy projects by providing property owners with up-front capital to fund clean energy improvements, which is subsequently paid back through tax assessments on the property.
The mortgagee letter allows properties encumbered with a PACE assessment to be eligible for FHA financing, both for new purchases and refinances. Under the mortgagee letter, when a PACE assessed property is sold, the contract of sale must state whether:
  • The seller will satisfy the PACE obligation at or before closing.
  • The obligation will remain with the property.
If the obligation remains with the property:
  • The contract of sale must incorporate all terms of the PACE obligation.
  • The appraiser must determine the impact of the PACE-related improvements on the value of the property.

Eligible Properties

For a PACE assessed property to be considered for FHA financing, the mortgagee must verify that the following requirements are met:
  • The PACE obligation must be treated like a special tax assessment under the state's PACE legislation. Accordingly, PACE obligation payments should be made to the local municipality just as a property owner makes its property tax payments.
  • Only delinquent PACE payments may take priority over a mortgage.
  • The PACE legislation must not limit the ability of the property owner to transfer the property to a new property owner.
  • The PACE obligation must be recorded and include both:
    • the expiration date; and
    • the cause of the expiration (which cannot be caused by acceleration by default).
  • The PACE obligation must run with the land.

Practical Implications

Experts anticipate that this new guidance will lead to new PACE legislation. For municipalities that currently have PACE programs for commercial properties, the new guidance may cause an expansion into residential properties.
Lenders should instruct their underwriting departments on how to handle PACE assessed properties, and develop procedures to ensure that the PACE obligation adheres to the FHA guidance.
Servicers should also be aware of and prepare procedures to address the new guidance because the PACE obligation may be superior to the mortgage loan they are servicing.