The Property Assessed Clean Energy (PACE) loans programs provide financing for homeowners to make their homes more energy efficient. To date, more than 20 states have enacted legislation related to the development of PACE loans, and PACE loan programs are operational in California, Florida and Missouri. Each state operates PACE lending under its own laws.
Organizations such as the Mortgage Bankers Association have expressed serious concerns about the lack of uniform regulations for PACE loans, claiming that consumers and lenders alike are exposed to unnecessary risk. In response to these concerns, the Department of Housing and Urban Development (HUD) announced in 2017 that the Federal Housing Administration (FHA) would no longer insure mortgages that carry PACE loan encumbrances. In 2018, the Veterans Administration (VA) also announced that it planned to sunset its financing for the purchase or refinancing of homes carrying PACE home encumbrances.
Nonetheless, PACE lending remains an important tool for homeowners to improve the energy efficiency of their homes with renewable energy sources like solar panels, along with improvements such as energy efficient windows and water conservation. Savvy real estate industry players understand the importance of PACE data in making lending decisions. Fortunately, technology exists to make short work of obtaining and analyzing PACE data.
Consumer and Lender Exposure Under PACE Regulations
There are two major areas of concern associated with PACE lending. First, PACE loans are not subject to conventional credit underwriting. Instead of assessing a potential borrower’s income and credit profile, PACE underwriting relies on the homeowner’s equity in the property along with mortgage and property tax payment history.
PACE loans are also frequently administered through private companies, financed by issuing municipal revenue bonds and secured by PACE loan payment obligations. This opens consumers to the potential of obtaining loans that they are not in a financial position to repay. PACE loan encumbrance can also impede homeowners’ ability to refinance mortgages or sell their homes.
The second concern associated with PACE loans is that their structuring often shifts lien priority in the unfortunate event of a homeowner’s default. Ordinarily, because mortgages are secured loans, primary mortgage lenders hold lien priority in the event of a homeowner’s insolvency. In plain English, lenders are often among the first to receive distribution of the debtor’s liquidated assets. However, PACE loan payments are added to the borrower’s property tax assessments and repaid in installments over the life of the PACE loan, often totaling 15 or 20 years. As a result, PACE loans often leapfrog over mortgages in lien priority.
How HUD’s New Policy Impacts Your Lending Business
HUD’s shift in policy concerning mortgages carrying PACE encumbrances was driven by a desire to protect the solvency of its flagship fund, the Mutual Mortgage Insurance (MMI) Fund. According to HUD, the capital ratio of the MMI Fund declined in the past year, although it remained above its 2 percent Congressional mandated threshold.
In a letter issued December 2017, HUD also stated that PACE loans created substantial potential risks for borrowers, risks that they may not be aware of.
“While the existence of FHA-insured financing for properties with PACE assessments creates additional choices for financing options, potential borrowers may face risk associated with the potential for property overvaluation due to the unknown or miscalculated effect of the PACE lien on the property value.”
HUD’s policy shift is also an attempt to reduce potential borrower exposure to risks from property overvaluation. The specific impact of the policy shift applies to FHA insured primary mortgages and refinancing:
- Going forward, properties with PACE encumbrances will be ineligible for FHA insurance.
- Existing PACE obligations will be eligible for repayment through Rate and Term Refinancing.
- Current policies that allow Cash-Out refinancing to pay off PACE obligations remain unchanged.
Minimizing PACE-Related Financial Exposure through Real Estate Data
The lack of standardization for underwriting PACE loan applications, along with HUD’s policy shift make it necessary for mortgage lenders to protect themselves. Accurate data represents one of the most potent tools for minimizing lender risk. This does not mean wholesale rejection of any and all mortgage applications for properties associated with PACE loans. Instead, lenders must arm themselves with the means to ensure that the loans they make are extended to potential homeowners who can afford the monthly mortgage premiums.
Mortgage lenders have a duty to maintain high standards for prospective borrowers and reduce their exposure to bad loans. Real estate data provides lenders with ready access to information they need regarding PACE loan encumbrances along with conventional underwriting tools. DataTree’s Mortgage Lending Data Analytics allows lenders to verify a prospective borrower’s income and identify fraud risks or potential errors in mortgage applications. To learn more about how DataTree empowers lenders, check out our Demo and Free Trial.
Title: PACE Financing Information | Real Estate Data Services
Description: Real estate industry players understand the importance of PACE data in making lending decisions. Fortunately, technology makes obtaining and analyzing PACE data easier.