In an effort to protect the protect the health of its Single Family Mutual Mortgage Insurance Fund (MMIF), the Federal Housing Administration (FHA) is no longer insuring new mortgages on properties that include Property Assessed Clean Energy (PACE) assessments.
In a release, the FHA says it will continue to insure existing loans with PACE liens, but it will no longer take on new loans with PACE liens due to the unknown degree of risk involved.
Part of the problem is that it is almost impossible for the FHA to assess whether home improvements made with PACE loans were carried out properly. PACE programs are authorized by local governments under state legislation and the work is done by private contractors. They are secured by a property tax lien and are collected through the homeowner’s local tax bill.
One major problem is that some contractors push expensive projects onto homeowners that don’t result in much energy savings. The other major problem is that no underwriting takes place for these loans to ensure the borrower has the ability to repay.
As such, these loans, which are primarily aimed at lower-income homeowners, pose a serious risk to the health of the MMIF, which went into the red a few years back, requiring FHA to request its first-ever government bailout.
In its Fiscal Year 2017 Annual Report, the FHA says the MMIF has a total economic net worth of about $25.6 billion and “a capital ratio that remains above the statutory minimum [of 2%] for a third straight year.”
“[The] 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,” says U.S. Housing and Urban Development (HUD) Secretary Ben Carson, in a statement. “Assessments such as these are potentially dangerous for our MMIF 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 FHA is also concerned about the loans it is insuring that already have PACE obligations.
“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,” the agency says in a release. “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.”
In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association, said his group “fully supports these reforms.”
“PACE liens pose a real danger to secured lenders and to the MMIF because they erode the underlying collateral due to their priority lien position in the event of default,” Stevens says. “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.
“However, consumers should still be very wary of these dangerous loans, which are not yet subject to important federal consumer protection laws,” Stevens adds. “In addition, consumers need to understand that PACE loans can significantly hinder their ability to later sell their house. 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.”
To read the FHA’s Mortgagee Letter, click here.