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We all know how important it is to own an energy efficient home. The less use of heating and cooling, and related energy resources, the more affordable a home can be.
HUD is making changes that would allow homes to be insured that carry a lien for such improvements when done under Property Assessed Clean Energy (PACE) programs.
A property that is carrying a PACE lien may be sold and transferred to a new buyer that will obtain an FHA-insured mortgage when:
- By law the payment for the PACE lien is collected, escrowed, and paid regularly by the creditor (escrowed like taxes);
- An action to enforce the PACE lien, prior to the FHA insured lien, may only come for delinquency.
- There are no conditions which would prohibit the transfer of the property and lien to a new owner.
- The PACE lien is properly recorded and apparent to all parties;
- In the event of a transfer, including through foreclosure, the lien will remain on the property and become the responsibility of the new owner.
Here are more details on HUD’s guidelines concerning loans insured with PACE liens outlined in HUD Mortgage Letter 2016-11.
This has raised some controversy, as some, including the MBA, believe that this puts low to moderate income homebuyers, and FHA, at additional risk (PACE Risks). Since the PACE lien is levied against the property essentially as additional taxes, the homeowner’s mortgage payments are increased monthly by the additional amount of the lien payments. In the event of a problem, it may be harder for the borrower to maintain the higher payments.
In the event of a default, FHA will take over the responsibility for the PACE lien after a foreclosure increasing their cost to administer REO properties.
But on the flip side, the new borrower gets a more energy efficient home, reducing their monthly costs to maintain the home. In the event of a foreclosure, FHA takes back a property which has been updated with the energy efficient upgrades making it more valuable and reducing the work and cost to make these improvements before resale.
This could work out well for existing homeowners, buyers, and FHA. Anything that helps these groups also helps the housing market, which is good for lenders.
- Existing homeowners can obtain the PACE loans and related energy improvements without fear of restrictions on any resale, while reducing their cost of homeownership;
- Borrowers of PACE homes can “assume” the immediate benefits of the improvements while paying the costs over time;
- The improvements and related reduced costs help FHA buyers have a better chance of retaining and maintain their homes;
- In the unfortunate event of a default, the FHA gets back an upgraded, energy efficient property.
As always, the key is in the underwriting and approving a buyer for a potential FHA-insured mortgage on a PACE property. Ensure the borrower can afford the added monthly assessment for the PACE loan, taking into account the reduced energy costs.
This may be a good way to update older housing stock to be much more energy efficient for many low to moderate income homeowners and buyers. This reduces their cost of homeownership while reducing the use of energy resources. A win-win for everyone.
