FHA Issues Guidance on Insuring Properties with PACE Assessments
On July 19, the Federal Housing Administration (FHA) issued a mortgagee letter clarifying the conditions in which it will insure mortgages on properties that have Property Assessed Clean Energy (PACE) assessments. While PACE structures vary, states generally treat PACE assessments on properties as they do other special assessments, such as property taxes. Under this structure, the owner of the property with a PACE assessment pays off the obligation to the local government, not the party who provided funding for the improvements.
In some cases, PACE assessments generate a lien on the property. This has created a conflict between PACE loans and FHA because federal law prohibits FHA from insuring any property that has any liens attached to it other than the FHA-insured mortgage. In its announcement of the mortgagee letter, FHA acknowledged the importance of improving energy efficiency in residential homes and said the PACE program is an effective way to do so.
FHA’s new guidelines will allow PACE obligations on properties in which the PACE obligation is collected like a property tax. For a mortgage on a property with a PACE assessment to be eligible for FHA insurance, a lender must first conclude that the following requirements, as stated in the announcement, are met:
- The PACE obligation must be collected (escrowed) and secured by the creditor in the same manner as a special assessment against the property;
- The PACE obligation cannot accelerate – namely, the entire amount of the obligation cannot become due in the event of delinquency after endorsement of the FHA-insured mortgage. The property may be subject to an enforceable claim or lien that is superior to the FHA-insured mortgage but only for the delinquent portion of the PACE obligation;
- There are no terms or conditions that limit the transfer of the property to a new homeowner;
- The existence of a PACE obligation on a property is readily apparent to mortgagees, appraisers, borrowers and other parties to an FHA-insured mortgage transaction, and information on PACE obligations must be readily available for review in the public records where the property is located; and
- In the event of the sale, including a foreclosure sale, of the property with outstanding PACE financing, the PACE assessment remains with the property. In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished. Unless a payoff is negotiated, the buyer will assume the obligation and will be responsible for the payments on the outstanding PACE amount.