This guidance applies to the origination of all FHA Title II forward mortgage programs, and the Home Equity Conversion Mortgage program (HECM). This guidance is effective for case numbers issued thirty days after the date of this ML.
In ML 2016-11, FHA established requirements regarding the eligibility for FHA-insured mortgages of properties encumbered with PACE (Property Assessed Clean Energy) obligations that permitted, under some circumstances, a continuing obligation for repayment of the PACE obligation even after foreclosure and acquisition by FHA.
FHA is concerned about the potential for increased losses to the Mutual Mortgage Insurance Fund due to the priority lien status given to such assessments in the case of default. FHA is also concerned with the lack of consumer protections associated with the origination of the PACE assessment, which are far less comprehensive than that of traditional mortgage financing products. FHA’s involvement with accepting properties with PACE assessments may indirectly help to overshadow potential consumer abuses.
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.
FHA is also aware of the need to provide guidance regarding the extinguishment of PACE obligations in association with forward mortgage refinances and HECMs.
Accordingly, FHA has revised its policies with respect to the insurance of mortgages on properties encumbered with PACE obligations.
The policies and procedures for the servicing of FHA-insured mortgages on properties encumbered with a PACE obligation as announced in ML 2016-06 are not impacted by this ML and remain in effect.
Summary of Changes:
The following is a summary of policy changes, which is provided for informational purposes only.
Outstanding PACE Obligations
Properties encumbered with PACE obligations will no longer be eligible for FHA-insured forward mortgages.
Refinances
Clarification is provided to identify PACE obligations as existing debt that may be paid off using a Rate and Term Refinance.
Current policies allowing the use of a Cash-Out refinance to pay off PACE obligations remain unchanged.
HECMs
The existing prohibition of properties encumbered with PACE obligations remains unchanged for HECMs.
Clarification is provided to identify PACE obligations as Mandatory Obligations that must be paid off at closing, and may be paid off using HECM proceeds.
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