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FHA to Stop Insuring Mortgages on Properties Subject to PACE Loans
Practical Law Legal Update w-012-1655 (Approx. 3 pages)
FHA to Stop Insuring Mortgages on Properties Subject to PACE Loans
by Practical Law Real Estate
| Published on 19 Dec 2017 • USA (National/Federal) |
The Federal Housing Administration (FHA) recently announced that properties subject to Property Assessed Clean Energy (PACE) loans are no longer eligible for FHA insured mortgages.
On December 7, 2017, the Federal Housing Administration (FHA) announced it will no longer insure new mortgages on homes with Property Assessed Clean Energy (PACE) loans. This change goes into effect January 6, 2018.
Background
PACE loans support renewable energy projects by providing property owners with up-front capital to fund clean energy improvements. The borrower repays the loan through tax assessments on the property. In September 2016, the FHA began insuring mortgages on properties with PACE loans in an effort to expand clean energy financing options (see Legal Update, FHA to Insure Mortgages with PACE Loans).
On December 7, 2017, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2017-18 (Letter) announcing the FHA will no longer insure mortgages on properties encumbered by PACE loans. In issuing the new policy, the FHA cited concerns with:
- The priority lien status PACE loans hold over FHA mortgages in some states, which the FHA believes will increase losses to the Mutual Mortgage Insurance Fund, the federal fund used to insure mortgages.
- The lack of federal consumer protections in the origination of PACE loans.
Effect on Properties with PACE Loans
The Letter revises and clarifies the FHA's policy on PACE loans as follows:
- Properties encumbered with PACE loans are no longer eligible for FHA insured mortgages.
- PACE loans are considered existing debt that may be paid off with FHA Rate and Term Refinancing.
- PACE loans must be paid off at the closing of FHA Home Equity Conversion Mortgages (HECM), and can be paid off with HECM funds.
HUD's press release regarding the new policy can be read here.
Practical Implications
This announcement ends the FHA's policy of insuring properties with PACE loans. PACE loans must now be paid off at, or before, the closing of a refinancing or sale of a homeowner's property when an FHA loan is involved.
Homeowners may also want to explore other options for financing energy efficient projects, as PACE loans may cause complications when trying to refinance their home.
For more information on federal mortgage regulations, see Practice Note, US Consumer Mortgage Regulations: Overview.