FHA Answers Concerns about Lien Priority for Energy Efficiency Loans

The Federal Housing Administration today announced that it will finance single-family home loans for energy-efficiency retrofitting, provided those loans preserve payment priority for first-lien mortgage holders. The move comes after some local authorities — using a program called PACE that is currently authorized in 30 states — have structured retrofitting to be financed through property tax assessment, thus giving the liens so-called super-priority to the first-mortgage holders.

The FHA said it will develop guidance on PACE loans for lenders based on the principle that PACE financing — among other provisions — will be at fixed rates and fully amortizing; will preserve payment priority for first lien holders; will be fully recorded; and will not exceed the FHA’s maximum loan-to-value ratio.

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, has warned that the GSEs cannot buy mortgages on homes with first-lien PACE loans attached to them, thus reducing the marketability of the home. The FHA’s move is intended to help alleviate these concerns and facilitate sales and transfers of retrofitted homes. ABA and other housing groups have expressed concern about the risks that the PACE program and other attempts to place super-priority liens could have on consumers and on the housing market overall.