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Energy-efficient PACE loans draw industry fire

The powerful Mortgage Bankers Association (MBA) is raising warning alarms about home energy-efficiency improvement loans that were recently endorsed by the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Veterans Affairs (VA). 

In July, HUD officials signaled that they favor greater use of Property Assessed Clean Energy (PACE) loans for homes and for the first time provided a framework whereby the Federal Housing Administration (FHA) could guarantee mortgages with PACE loans attached to a property. The VA also has released a similar set of guidelines for mortgages backed by the VA.

PACE loansPACE loans are a special kind of loan typically sponsored by local governments and used to pay for energy-efficiency improvements, such as solar panels, geothermal heating, energy-efficient appliances and windows. Using PACE loans, property owners can cover the large upfront costs for these improvements that aren’t easily recouped if the owner later decides to sell the property.

The loans are available in states that have adopted specific legislation allowing local governments to fund the improvements, and then structure the loan as a tax assessment. The loan payment appears on the property’s tax bill for five to 20 years and are paid by the borrower through property-tax installments. The PACE loan survives as a lien on the property even after it is sold to a new owner.

PACE loans have been more widely accepted for improvements on commercial properties, but these moves could make them much more widely used with residential properties. 

In a letter this month to the Consumer Financial Protection Bureau (CFPB), MBA made the case that PACE loans are a more expensive, less-transparent option for homeowners than conventional financing. 

The trade group also argued that the agency loan programs would be put at greater risk. HUD and VA have adopted several measures to lessen the risk. According to the MBA and the National Association of Realtors, however, the guidelines are weaker than standards adopted by the Federal Housing Finance Agency (FHFA). FHFA has previously advised lenders that Fannie Mae and Freddie Mac would not purchase loans with PACE assessments that hold a first-lien position. 

According to the MBA, the agency would essentially be backing large home-improvement loans that could take first-lien priority in a default situation. 

“MBA and its members believe that energy-efficient home improvements provide homeowners with a wide variety of benefits, and want to help homeowners safely and sustainably finance these kinds of improvements,” MBA Vice President Pete Mills said.  

“However, we are concerned that this program, as designed, would leave low- and moderate-income FHA borrowers more vulnerable to being misled and steered into financial obligations that they may not fully understand due to lack of disclosure.” 


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