The Department of Housing and Urban Development has announced that the Federal Housing Administration will no longer insure mortgages on homes that carry Property Assessed Clean Energy loans. The decision reverses HUD's announcement last year that the FHA would begin insuring mortgages that carry PACE liens. The FHA now joins the Federal Housing Finance Agency, which has barred Fannie Mae and Freddie Mac from purchasing mortgages on homes with PACE loans.
A PACE loan allows a homeowner to borrow money to finance energy upgrades. The loan is then repaid as a surcharge on the homeowner's property tax and takes priority over the mortgage. The loan travels with the house and is transferred to the buyer upon purchase.
The FHA's decision is based on its concern on the impact of the PACE liens and potential losses to the FHA's flagship fund, the Mutual Mortgage Insurance Fund, due to the priority lien status given to these assessments in case of default and the lack of consumer protections associated with the origination of the PACE assessment.
The housing industry has applauded FHA's move, particularly in California, which accounts for the most growth in the PACE program. "C.A.R. supports this change that aligns FHA's policy with Fannie Mae and Freddie Mac's so there will be no confusion in the marketplace," C.A.R. President Steve White said in a statement.
California Realtors have been particularly outspoken about their concerns about the PACE program. Though PACE loans are a way to finance important energy efficiency and water conservation projects, such as insulation, double-pane windows and solar panels, Realtors warn PACE loans have some real risks.
The PACE loan takes primary position to the mortgage. Homeowners may have difficulty refinancing or selling their home if the new mortgage holder does not allow for PACE loans. Under these situations, they would need to pay off the loan in full before proceeding.
The Silicon Valley Association of Realtors has cautioned consumers to be aware of the risks associated with these loans. The best practice is full disclosure and speaking with the mortgage holder.
In 2016, Gov. Brown signed C.A.R. sponsored bill AB 2693 which requires disclosures be provided to property owners participating in a PACE program, a three-day right to cancel, along with a notice that the property owner may not be able to refinance or sell without paying off the PACE loan. Last fall, the Governor signed two more bills, adding consumer protections for PACE transactions. SB 242 requires recorded phone confirmation of terms before a contract is signed and requires contractors to quote property owners the same price as cash for projects. AB 1284 requires PACE providers to verify a homeowner's ability to pay the annual PACE assessments before extending financing, establishes licensing standards and training for PACE providers, including monitoring of contractors, and designates the California Department of Business Oversight as PACE program regulator.
The new laws on contractors take effect on January 1, 2018. The income verification and ability-to-pay rules go into effect in April.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.