FHFA revives the idea of tighter underwriting to address PACE risks

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The Federal Housing Finance Agency is considering bringing back the idea of imposing stricter criteria on loan purchases in areas where residential Property Assessed Clean Energy financing is available.

The agency could, for example, set lower loan-to-value ratios for loans purchased by the government-sponsored enterprises in areas where the financing for energy-related residential improvements is available.

FHFA's headquarters in Washington, D.C.

The idea is one of several the FHFA reintroduced in a recent request for input due March 16. The RFI follows up on a statement FHFA made in 2010 indicating it could lower LTVs or take other steps to address risks posed by PACE financing.

Fannie and Freddie won’t purchase, and the Federal Housing Administration won’t insure, loans with collateral properties that have PACE super-liens, but the risk remains that borrowers with outstanding home loans could opt to finance energy-related improvement through the program after origination.

PACE loans also pose additional risks in the mortgage industry because they “run with the land” and successive buyers of properties must take on responsibility for the payment of any outstanding obligations related to this form of financing, the FHFA noted in its RFI.

In addition to lowering LTVs, risk-management ideas being revived include the proposed tightening of debt-to-income ratios for Fannie and Freddie loans, and restrictions designed to address the risk that loans used as collateral for Federal Home Loan Bank advances could have PACE loan exposures.

The FHFA in its RFI additionally proposes to make PACE exposures easier to track through methods that include, for example, requiring mortgage servicers to “gather and report such information to the enterprises on a periodic basis” or asking “states that authorize PACE programs to require a registry.”

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