Mortgages Analyzed
 
HUD Mortgagee Letter
Property Assessed Clean Energy (PACE)
 
 
Citation:
ML 2017-18
Agency:
Housing and Urban Development
Type:
HUD Mortgagee Letter
Publish Date:
Dec 07, 2017
Keywords:
Source:
Attachment(s):
Citation:
ML 2017-18
Agency:
Housing and Urban Development
Type:
HUD Mortgagee Letter
Publish Date:
Dec 07, 2017
Keywords:
Source:
Attachment(s):
 

Summary

HUD Mortgagee Letter ML 2017-18 transmits revised policies for insuring mortgages secured by Single Family 1-4 unit properties encumbered with Property Assessed Clean Energy (PACE) obligations. This guidance is effective for case numbers issued thirty days after the date of this ML.

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.

HUD Mortgagee Letter


U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

 

WASHINGTON, DC 20410-8000

 

ASSISTANT SECRETARY FOR HOUSING – FEDERAL HOUSING COMMISSIONER

 

Date: December 7, 2017

Mortgagee Letter 2017-18

To:

All FHA-approved Mortgagees
All Direct Endorsement Underwriters
All FHA Roster Appraisers
All FHA Roster Inspectors
All FHA-approved 203(k) Consultants
All HUD-approved Housing Counselors
All HUD-approved Nonprofit Organizations
All Governmental Entity Participants
All Real Estate Brokers
All Closing Agents

 

Subject

Property Assessed Clean Energy (PACE)

 

Purpose

This Mortgagee Letter (ML) transmits revised policies for insuring mortgages secured by Single Family 1- 4 unit properties encumbered with Property Assessed Clean Energy (PACE) obligations.

 

Effective Date

This guidance is effective for case numbers issued thirty days after the date of this ML.

All policy updates will be incorporated into a forthcoming update of the HUD Single Family Housing Policy Handbook 4000.1 (Handbook 4000.1).

 

Public Feedback

HUD welcomes feedback from interested parties for a period of 30 calendar days from the date of issuance. To provide feedback on this policy document, please send any feedback to the FHA Resource Center at answers@hud.gov. HUD will consider the feedback in determining the need for future updates.

Affected Programs

This guidance applies to the origination of all FHA Title II forward mortgage programs, and the Home Equity Conversion Mortgage program (HECM).

Background

In ML 2016-11, FHA established requirements regarding the eligibility for FHA-insured mortgages of properties encumbered with PACE obligations that permitted, under some circumstances, a continuing obligation for repayment of the PACE obligation even after foreclosure and acquisition by FHA. These requirements were subsequently incorporated into the HUD Single Family Housing Policy Handbook 4000.1 (Handbook 4000.1).

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

Attached to this ML are additions and revisions to the Handbook 4000.1. 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.

 

Single Family Policy Handbook 4000.1

The attached updates to HUD’s Single Family Housing Policy Handbook 4000.1 will be incorporated in a future publication of the Handbook.

 

HECM Program

Properties which will remain encumbered with a PACE obligation are not eligible for an FHA-insured HECM.

The payoff of a PACE obligation is a Mandatory Obligation and it must be paid off at closing, and may be paid off using HECM proceeds.

 

Paperwork Reduction Act

The information collection requirements contained in this document are approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control numbers 2502-0059 and 2502-0524. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to a collection of information unless the collection display a currently valid OMB control number.

 

Questions

For additional information on this ML, please visit www.hud.gov/answers or call FHA’s Resource Center at 1-800-CALLFHA (1-800-225-5342). Persons with hearing or speech impairments may reach this number via TTY by calling the Federal Relay Service at 1-800-877-8339.

 

Signature

Dana T. Wade
General Deputy Assistant Secretary for Housing

 

Attachment


 

II.A.1.a.i(E)(1)(a)(iii)

  (E) Sales Contract and Supporting Documentation

    (1) Sales Contract

      (a) Standard

        (iii) Property Assessed Clean Energy

Where the subject Property is encumbered with a Property Assessed Clean Energy (PACE) obligation, the sales contract must include a clause specifying that the PACE obligation will be satisfied by the seller at, or prior to, closing.


 

II.A.1.a.iii(B)(6)(e)

  (B) Initial Document Processing

    (6) Ordering Appraisals

      (e) Additional Requirements When Ordering an Appraisal

The Mortgagee must provide to the selected Appraiser the FHA case number and a complete copy of the subject sales contract including all addendums, land lease, surveys and other legal documents contained in the mortgage file necessary to analyze the Property.

The Mortgagee must disclose all known information regarding any environmental hazard that is in or on the subject Property, or in the vicinity of the Property, whether obtained from the Borrower, the real estate broker, or any other party to the transaction.

Where the Mortgagee determines that the Property is subject to a PACE obligation, it must notify the Appraiser that the PACE obligation will be paid off as a condition of loan approval.


 

II.A.1.b.iv(A)(6)

  iv. Property Eligibility and Acceptability Criteria

    (A)General Property Eligibility

      (6) Property Assessed Clean Energy

Property Assessed Clean Energy (PACE) refers to an alternative means of financing energy and other PACE-allowed improvements for residential properties using financing provided by private enterprises in conjunction with state and local governments. Generally, the repayment of the PACE obligation is collected in the same manner as a special assessment tax; it is collected by the local government rather than paid directly by the Borrower to the party providing the PACE financing.

Generally, the PACE obligation is also secured in the same manner as a special assessment tax against the Property. In the event of a sale, including a foreclosure sale, of the Property with outstanding PACE financing, the obligation will continue with the Property causing the new homeowner to be responsible for the payments on the outstanding PACE amount. In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished.

Properties which will remain encumbered with a PACE obligation are not eligible for FHA mortgage insurance.


 

II.A.4.a.iii(A)(1)

  ii. Function of TOTAL Mortgage Scorecard

    (A) Automated Underwriting System Data Entry Requirements

      (1) Mortgagees

The Mortgagee must verify the integrity of all data elements entered into the AUS to ensure the outcome of the Mortgage credit risk evaluation is valid including:

  • Borrower’s Credit Report
  • Borrower’s Liabilities/Debt
  • Borrower’s Effective Income
  • Borrower’s Assets/Reserves
  • Adjusted Value
  • Borrower’s total Mortgage Payment including Principal, Interest, Taxes, and Insurance (PITI)

The Borrower’s total Mortgage Payment includes:

  • Principal and Interest (P&I);
  • real estate taxes;
  • hazard insurance;
  • flood insurance as applicable;
  • Mortgage Insurance Premium;
  • HOA or condominium association fees or expenses;
  • Ground Rent;
  • special assessments;
  • payments for any acceptable secondary financing; and
  • any other escrow payments.

 

II.A.5.d.vii(B)

  d. Final Underwriting Decision (Manual)

    vii. Calculating Qualifying Ratios (Manual)

      (B) Calculating Total Mortgage Payment

The total Mortgage Payment includes:

  • P&I;
  • real estate taxes;
  • hazard insurance;
  • flood insurance as applicable;
  • MIP;
  • HOA or condominium association fees or expenses;
  • Ground Rent;
  • special assessments;
  • payments for any acceptable secondary financing; and
  • any other escrow payments.

The Mortgagee may deduct the amount of the Mortgage Credit Certificate or Section 8 Homeownership Voucher if it is paid directly to the Servicer.


 

II.A.6.a.viii(A)

  a. Mortgagee Closing Requirements

    viii. Projected Escrow

      (A) Monthly Escrow Obligations

The Mortgagee must collect a monthly amount from the Borrower that will enable it to pay all escrow obligations in accordance with 24 CFR § 203.23. The escrow account must be sufficient to meet the following obligations when they become due:

  • hazard insurance premiums;
  • real estate taxes;
  • Mortgage Insurance Premiums (MIP);
  • special assessments;
  • flood insurance premiums if applicable;
  • Ground Rents if applicable;
  • servicing, maintenance, repair and replacement of water purification equipment; and
  • any item that would create liens on the Property positioned ahead of the FHA-insured Mortgage, other than condominium or Homeowners’ Association (HOA) fees.

 

II.A.8.d.vi(A)(2)(b)(i)

  vi. No Cash-Out Refinances

    (A) Rate and Term

      (2) Maximum Mortgage Amount

        (b) Calculating Maximum Mortgage Amount

          (i) Standard

The maximum mortgage amount for a Rate and Term refinance is:

  • the lesser of:
    • the Nationwide Mortgage Limit;
    • the maximum LTV based on the Maximum LTV Ratio from above; or
    • the sum of existing debt and costs associated with the transaction as follows:
  • existing debt includes:
  • the unpaid principal balance of the first Mortgage as of the month prior to mortgage Disbursement;
  • the unpaid principal balance of any purchase money junior Mortgage as of the month prior to mortgage Disbursement;
  • the unpaid principal balance of any junior liens over 12 months old as of the date of mortgage Disbursement. If the balance or any portion of an equity line of credit in excess of $1,000 was advanced within the past 12 months and was for purposes other than repairs and rehabilitation of the Property, that portion above and beyond $1,000 of the line of credit is not eligible for inclusion in the new Mortgage;
  • ex-spouse or co-Borrower equity, as described in “Refinancing to Buy out Title Holder Equity” below;
  • interest due on the existing Mortgage(s);
  • the unpaid principal balance of any unpaid PACE obligation;
  • Mortgage Insurance Premium (MIP) due on existing Mortgage;
  • any prepayment penalties assessed;
  • late charges; and
  • escrow shortages;
  • allowed costs include all Borrower paid costs associated with the new mortgage; and
  • any Borrower-paid repairs required by the appraisal;
  • less any refund of the Upfront Mortgage Insurance Premium (UFMIP).

 

II.D.12.d.iv(B)

  d. Special Energy-Related Building Components

    iv. Property Assessed Clean Energy

      (B) Required Analysis and Reporting

The Appraiser must review the sales contract and property tax records for the Property to determine the amount of any outstanding PACE obligation:

  • if the Mortgagee notifies the Appraiser that the subject Property is subject to a PACE obligation;
  • when the Appraiser observes that the property taxes for the subject Property are higher than average for the neighborhood and type of dwelling; or
  • when the Appraiser observes energy-related building components or equipment or is aware of other PACE-allowed improvements during the inspection process.

The Appraiser must report the outstanding amount of the PACE obligation for the subject Property.

 

Where energy and other PACE-allowed improvements have been made to the Property through a PACE program, the Appraiser must analyze and report the impact on the value of the Property from the PACE-related improvements subject to the PACE assessments being extinguished.



Glossary

Property Assessed Clean Energy (PACE)

Property Assessed Clean Energy (PACE) refers to an alternative means of financing energy and other PACE-allowed improvements to residential properties using financing provided by private enterprises in conjunction with state and local governments. Generally, the repayment of the PACE obligation is collected in the same manner as a special assessment taxes is collected by the local government rather than paid directly by the Borrower to the party providing the PACE financing.

Generally, the PACE obligation is also secured in the same manner as a special assessment against the property. In the event of a sale, including a foreclosure sale, of the property with outstanding PACE financing, the obligation will continue with the property causing the new homeowner to be responsible for the payments on the outstanding PACE amount. In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished.

Properties that will remain encumbered with a PACE obligation after closing are not eligible for FHA mortgage insurance.



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