The Federal Housing Administration (FHA) recently released new restrictions on the types of mortgages it will insure and eliminated certain energy-efficient homes in the process. In early December 2017, the FHA reversed a policy from the previous presidential administration that allowed the FHA to insure mortgages on homes carrying liens created by the Property Assessed Clean Energy (PACE) program. PACE funds energy efficient upgrades, such as the installation of solar panels. Moving forward in 2018, the FHA will not insure mortgages on homes carrying PACE loans if those liens are considered superior to the FHA’s position on the loan. This is a state-by-state issue.
FHA’s Reasoning
“The FHA is concerned about the potential for increased losses to the Mutual Mortgage Insurance Fund due to the priority lien status given to [PACE] assessments in the case of default,” the agency explained. In some states, PACE liens take priority over the 30-year mortgage note on the home if the homeowner defaults. This means that if a home goes into foreclosure, when it is sold and the debt paid off the PACE lien would be paid off before the FHA-insured mortgage note and, if there was not enough money for both to be paid in full, the 30-year note would take the loss. In that event, the FHA would have to pay out on the loan if it were FHA-insured.
HUD secretary Ben Carson said of the decision, “FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself.” FHA-insured loans on homes carrying PACE loans at present will continue to carry the FHA insurance, but no new policies will be issued moving forward. Furthermore, in the event that the home changes hands, new buyers should be aware that they may not be able to obtain an FHA-insured mortgage without first paying off the PACE loan, which travels with the property.
PACE loans are paid off over time via installments on property tax bills, so many homeowners do not realize that the lien will be an issue for a new buyer or an investor interested in their property. However, if you take ownership of a property in foreclosure with a PACE lien in place, you need to be prepared to resolve the debt if you want to market the home to a traditional retail buyer. Given that the FHA has insured more than 47.5 million properties since its inception, the odds are pretty good that you will encounter this issue at some point if you invest in foreclosures.
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