Banks Win FHA Support in Lien Fight with PACE Lenders
The Federal Housing Administration has resolved a long-standing conflict with municipalities and private companies that back "green energy" loans and also will allow higher loan amounts for energy improvements.
So-called Property Assessed Clean Energy loans help borrowers finance environmentally-friendly home improvement projects such as solar panels. A major sticking point has been that FHA mortgage lenders and PACE lenders have both staked claims to the same collateral — the borrower's homes — if their loans go bad. The policy question has been which side should get repaid first in the event of default.
The FHA said this week that it is developing lender guidance that says PACE loans are subordinate to a first lien mortgage.
Separately, the FHA launched an initiative with the Department of Energy that allows borrowers to obtain larger loans, of roughly 2% more than the loan amount, to finance energy improvements.
Both initiatives could be good for banks and mortgage lenders, experts say, and may stimulate the adoption of products that reduce energy expenses.
"Making a house more energy efficient or adding solar not only reduces utility expenses for residents, but should also add value to the house," said Philip Henderson, a senior financial policy specialist at the Natural Resources Defense Council. "These factors make for better loans — more valuable property means the house is more likely to sell for more than the loan amount, and lower utility expenses likely means a more affordable mortgage for the borrower."
The PACE loans, made by municipalities, are repaid by the homeowner as a line item on their property tax bills. Mortgage lenders have raised concerns that since PACE loans are essentially tax assessments they have a "super lien" status that take precedence over the first-lien mortgage, creating an impediment to the sale and refinancing of properties.
But the FHA's guidance would change the equation by subordinating PACE liens, allowing borrowers with FHA loans to refinance or sell their properties instead of having to pay off the PACE loan as a condition of getting a new mortgage.
That move may set the stage for the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to make a similar move. The agency does not allow the purchase or refinancing of properties with Fannie or Freddie mortgages if the property has a first-lien PACE loan attached to it.
FHA said it has had "ongoing conversations with the Federal Housing Finance Agency."However, that is no guarantee the finance agency will follow the FHA's lead.
"We support programs to help borrowers make energy efficient improvements to their homes and will continue to explore ways of accomplishing this objective that do not jeopardize the first lien position of mortgages backed by Fannie Mae and Freddie Mac," Corinne Russell, an FHFA spokeswoman, said in an email.
Two California companies, Renovate America in San Diego and Renew Financial in Oakland, stand to benefit from the FHA's guidance. The private companies administer programs for local municipalities and charge fees for doing so.
In April, Renovate America hired two former Democratic White House advisers: Gene Sperling, a former principal economic advisor to both President Obama and President Clinton, and Ari Matusiak, a former special assistant to the president and director of private sector engagement.
"From a banker's perspective, this is a good thing because [PACE loans are] moving from a super senior lien position to a subordinate position, which the banking community has been requesting and pushing for," said J.P. McNeill, founder and CEO of Renovate America. "Conventional forms of financing have had very little success at encouraging the adoption of energy efficient improvements."
The company administers the Home Energy Renovation Opportunity program, known as HERO, which has funded roughly 41,000 energy efficient projects, mostly upgrades of windows, doors, roofs and HVAC systems. Its average loan is roughly $21,000.
"Property Assessed Clean Energy is an example of public policy that enables the marketplace to provide solutions that people need and want in their lives," Sperling said in a press release when he was hired by the company.
Cisco DeVries, the CEO of Renew Financial and the inventor of PACE financing, said in a press release Monday that "regulatory uncertainty" had until now limited the expansion of such financing.
PACE loans gained traction in California, Colorado and New Mexico, which all passed legislation in 2008 that enabled cities and counties to issue bonds to finance infrastructure improvements attached to a property. The PACE loans have fixed interest rates typically ranging from 6.75% to 8.35% depending on the terms.
There currently are no federal standards and a lack of uniformity for PACE loans. Some homeowners have raised concerns about the extent of consumer protections since the assessments are supervised by local governments, which ostensibly act as regulators of the programs.
The programs typically require that contractors be licensed with the state, obtain required permits and use products certified as energy efficient by the Department of Energy or by the Environmental Protection Agency for water conservation.
Some homeowners in California have complained that the energy improvements did not increase the value of their home and that prices for such products were too high.
But Matusiak said borrowers have to have at least 10% equity in the home in order to access financing.
"The goal of the program is for individuals to use our financing to install improvements that increase their disposable income by reducing energy and water consumption," Matusiak said. "In residential housing, people are paying $300 billion a year in core energy and water expenses on their home, which is a drag on their income. The products have been around for a very long time but there hasn't historically been a lot of pickup because there aren't effective financing solutions to make the products affordable."