In a very short time, the Federal Housing Administration, or “FHA,” will stop insuring new mortgages that are issued to homes with PACE and HERO loans. While the PACE program was a well-intentioned system to finance energy-efficiency changes, the structure of the loan program has made them controversial.
This announcement, which came in early December, comes on the heels of criticism against the program from consumer groups, who argue that misinformed borrowers are taking out unaffordable loans for energy upgrades, such as solar panel additions or window replacement, after they were misinformed on the specifics of the program.
When the FHA announced the new policy, they essentially said that PACE and HERO loans don’t have enough consumer protection and the program put borrowers and taxpayers at risk. Because they will not insure the loans, getting financing for homes with PACE obligations will become more difficult.
This is actually not the first time the PACE and HERO programs have come under scrutiny from a federal agency. The Federal Housing Finance Administration (FHFA), which is separate from the FHA, has already instructed Fannie Mae and Freddie Mac to not purchase mortgages on homes that have a PACE loan.
Why are PACE Loans a Problem for the FHA?
The problem with PACE loans is that, if foreclosure occurs, they must be paid off first, even if the home in question has a mortgage. Also, if the home is sold the PACE loan transfers to the new owner, but the FHA is claiming that elements of the program simply increase the likelihood that the new owner will pay less, making it tough for the PACE lender to meet its obligations.
PACE loans are a significant problem to lenders because they automatically jump to the front, becoming the superior loan. If a homeowner can’t make payments and the house is foreclosed on, the property will eventually go through a foreclosure auction. (Assuming the case isn’t settled.) The foreclosure sale will help the lender recover some of the money owed to them, but rarely will it cover the entire loan. When a house has a PACE loan, the government agency that wrote the PACE loan gets the first chance to recover their money from the foreclosure. The mortgage lender then gets to recover their funds, but mortgage lenders don’t like being second in line. (Nor, for that reason, does anyone.)
In the past, it was already difficult to find lending options on homes with PACE obligations. However, the FHA, VA, and USDA were potential solutions, as they could provide financing when other institutions could not. Now, however, this option is not available, making it even more difficult to work around the PACE problem.
The New Challenge for Current PACE Holders
The announcement creates two significant challenges for current homeowners with a PACE loan, as well as potential issues for anyone hoping to buy a home with a PACE loan. First of all, refinancing will be more difficult. FHA, VA, and USDA loans will not be available for refinancing a home. If you are hoping to refinance using one of these government agencies in the future, you will be out of luck.
The second issue is selling the home, which in turn creates problems for potential buyers. Because of the new regulations on PACE loans, the program will have to be fully paid off before the sale of the home can be finalized, assuming an FHA loan will be used. If the homeowner does not pay it off, buyers will not be able to use FHA loans to purchase the home, which severely limits sales opportunities.
History of PACE
The PACE concept was first implemented in 2008 and the programs are generally launched by local governments. The loans are financed and tied to the home, not necessarily the borrower. They are not paid back in typical loan payments, but instead paid back as an addition to the property tax.
According to the U.S. Department of Energy, PACE programs are started by a city or county that creates a land-secured financing district or another type of legal mechanism. The property owners then voluntarily agree to borrow money to install certain energy projects, while the lender provided funds to the property owner, which are used to complete the additions. Finally, the property owner repays the money through their property tax bill, with payments that can extend up to 20 years. These programs can be used for both commercial and residential properties.
In California, the loans are used for many different purposes, including the installation of low-flow toilets. Los Angeles, Riverside, San Bernardino, and San Diego counties all have PACE lenders that serve the local community.
There has been controversy tied to the programs before. In October of 2017, Califonia Governor Jerry Brown signed two bills that set a variety of rules for PACE programs. One of particular interest was the prohibition of kickback payments for contractors who sell the program, as well as rules requiring first-time borrowers to include income as a factor in PACE loan approval.
If You Have a PACE Loan, Act Now Before Time Expires
While the FHA has put the stop on mortgages for homes with PACE loans, there is still time to act.
The Department of Housing and Urban Development, which operated the FHA, has said that any case pulled within 30 days of their announcement will be honored.
Borrowers can still take advantage of a 30-day window to refinance your home if you have a PACE loan. Before time expires, you can still refinance with an FHA, VA, or USDA loan, or you can sell without having to pay off the PACE loan.
We will proudly continue to provide financing to properties with an existing HERO or PACE loans via conventional loans (non-HUD) with a subordination agreement from Ygrene.
Up until about June of 2017 Ygrene was providing these subordination agreements at the request of the homeowner. However, they stopped providing these agreements and explained to the homeowners that HUD didn’t require the subordination so they were no longer doing them.
Now that HUD and the FHA have changed policy, they will not allow a HERO Pace Loan on a property even with a subordination. However, it is possible that Ygrene will start providing subordination agreements – but as of yet they have not released any formal policies.
If you have a home with a PACE loan, please contact us today to learn more about the current available options and what you can do to refinance or sell the house. We’ll help you understand your current options and, if needed, help you take advantage of the 30-day window.
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