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FHA Program Could Solve PACE Issue

FHA News

Issues raised on conventional mortgages because of controversial energy home loans might be solved through a new Federal Housing Administration program.

The U.S. Department of Housing and Urban Development announced in the Federal Register for Nov. 10 a pilot program which will provide FHA mortgage insurance on loans for homeowners who are seeking to make energy improvements to their single family homes.

This pilot program is structured largely on FHA’s Title I Property Improvement Loan Program. If fully implemented, this program could be a substitute for Property Assessed Clean Energy loans — or PACE loans.

However, the enabling statute, the Consolidated Appropriations Act, 2010, directed HUD to conduct a pilot program so there will be a two-year test with an evaluation period to follow.

PACE loans are designed to promote energy improvements in homes by authorizing government loans for such improvements. These loans are repaid through special property tax assessments which prime any mortgage liens.

The Federal Housing Finance Agency recently directed Fannie Mae, Freddie Mac, and the home loan banks to cease accepting loans from jurisdictions having the authority to impose such special assessments; in FHFA’s view, the primacy of such assessments could threaten the viability of loans purchased by the GSEs.

By permitting the energy improvement loan to take second place, a loan insurance program such as the Energy Retrofit Pilot Program could provide a substitute mechanism for funding energy improvement loans.

The Title I regulations will govern the pilot program except as noted in the Federal Register notice. The loan insurance will cover 90% of the loan amount. The Pilot Program will be limited to specific geographic areas, which HUD will announce in the future.

The program is voluntary for lenders; only lenders who express an interest can be selected for the program.

FHA approval as a Title I lender is a prerequisite to participation, but HUD has indicated that it will expedite Title I approval of Title II approved mortgagees who are interested in participating. Lenders must submit expressions of interest in participating in the Program by Dec. 27, 2010.

HUD is taking comments on the program which must also be submitted by Dec. 27.

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