FHA to Discontinue Insuring Mortgages with PACE Assessments

On December 7, 2017, FHA issued Mortgagee Letter 2017-18, announcing that it will no longer insure new mortgages on properties that include Property Assessed Clean Energy (PACE) assessments. This new policy is effective for FHA case numbers issued 30-days after the date of this Mortgagee Letter.

FHA’s decision is part of a larger effort to protect the health of its Single Family Mutual Mortgage Insurance Fund (MMIF). Last month, FHA released its latest annual report on the fiscal health of the MMIF finding that the fund had a total economic net worth of $25.6 billion and the Capital Ratio that remains above the statutory minimum for a third straight year.

FHA is concerned about the potential for increased losses to the MMI due to the priority lien status given to PACE assessments in the case of default. FHA is also concerned with the lack of consumer protections associated with the origination of the PACE assessment, which are far less comprehensive than that of traditional mortgage financing products. FHA’s involvement in accepting properties with PACE assessments may indirectly help overshadow potential consumer abuses.

FHA is also concerned about PACE obligations being placed on FHA insured mortgages that are currently outstanding. The placement of these assessments on FHA insured mortgages creates a lack of transparency making it difficult for the agency to understand the true nature of the risks involved. In addition, such activity is risky for FHA borrowers and potentially violates the terms of their FHA insured mortgage. FHA intends to monitor this carefully to determine if further action is warranted.

Mortgagee Letter 2017-18 is available at: https://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/letters/mortgagee.

HUD’s press release on PACE is available at: https://www.hud.gov/press/press_releases_media_advisories.