WASHINGTON — The Federal Housing Administration will stop approving new mortgages on properties encumbered by assessments used to finance and update heating and cooling systems, the Department of Housing and Urban Development said Thursday.

These Property Assessed Clean Energy (PACE) assessments place taxpayers at risk, according to HUD Secretary Ben Carson, because PACE loans take a first-lien position.

“FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default,” Carson said in a press release.

HUD Secretary Ben Carson
“FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default,” said HUD Secretary Ben Carson. Bloomberg News

“Assessments such as these are potentially dangerous for our [FHA] Mutual Mortgage Insurance Fund and may have serious consequences on a consumer’s ability to repay, or when they attempt to refinance their mortgage or sell their home,” he added.

The ban on financing properties with existing PACE assessments goes into effect in 30 days, according to an FHA Mortgagee Letter dated Dec. 7.

The HUD press release said the FHA "is also concerned about PACE obligations being placed on FHA-insured mortgage that are already outstanding.”

"FHA intends to monitor this carefully to determine whether further action is needed," according to the announcement.

The largest provider of PACE Loans, Renew Financial Group, based in Oakland, Calif., could not be reached for comment.

But the Mortgage Bankers Association welcomed the FHA's PACE decision.

"MBA applauds HUD's announcement and fully supports these reforms," MBA President and CEO David Stevens said in a statement Thursday.

"PACE liens pose a real danger to secured lenders and to the [Mortgage Mutual Insurance Fund] because they erode the underlying collateral due to their priority lien position in the event of default," he said.

"HUD's actions today will help protect taxpayers and the FHA insurance fund, and will align FHA policy with that of Fannie Mae and Freddie Mac," he added.

Stevens also warned that "consumers should still be very wary of these dangerous loans, which are not yet subject to important federal consumer protection laws."

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry