HUD Secures Primacy of FHA Loans Over PACE Loans

HUD Secures Primacy of FHA Loans Over PACE Loans

PACE, the Property Assessed Clean Energy program, provides homeowners with financing to make energy-efficient improvements to their property. The program allows homeowners to make energy-saving retrofits immediately and repay the loan over a number of years. The duration of the loan varies by state, but the average timeline for repayment is around 20 years. If the property is sold before the PACE financing is repaid, the buyer is responsible for completing payments. Though the program is obviously designed to encourage environmentally-conscious investments, it isn’t without detractors.

Concern with the PACE Program

The Federal Housing Finance Agency (FHFA) issued a warning late last year, stating that some secondary liens, such as those created by PACE, could put FHA-guaranteed loans into a secondary position and create a considerable risk to taxpayers. Since then, the FHFA and others have been pushing for a rule that would subordinate liens created by the PACE program to loans guaranteed by the FHA. The Obama administration and the Department of Housing and Urban Development (HUD) have responded by creating guidance for the PACE program that protects the primacy of FHA loans. The move has gained support and participation from nearly all sectors of the real estate industry.

Realtors and Lenders Show Support for PACE Guidance

Despite their support for PACE and its goals, realtors, lenders, and various government departments have also recognized the need for reform. HUD has stated that PACE repayments must have a fixed rate and predetermined repayment schedule. Further, PACE assessments must be attached to single-family homes—those with 1-4 dwellings. These regulations were developed in cooperation with the CFPB and the Department of the Treasury. The National Association of Realtors has applauded HUD for ensuring that PACE loans remain subordinated to FHA loans. The Mortgage Bankers Association expressed similar sentiments, stating that the goals of the PACE program are admirable, but they shouldn’t put homeowners or FHA-loan providers at risk.

Strategic Partnership between FHA and Department of Energy

The FHA will ensure the energy efficiency of PACE improvements by using the Department of Energy’s (DOE) Home Energy Score, which is similar to an MPG test on vehicles. The Home Energy Score is rated between 1 and 10, with most homes scoring a 5. Those homes that receive a 6 or higher will be eligible to boost their income qualifying ratio by 2% above the established single-family FHA limit. Julian Castro, the HUD Secretary, stated that this partnership will allow homeowners to make smart financial and environmental choices.

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