Worker atop a roof covered in solar panels.
Property Assessed Clean Energy programs are used to finance energy efficiency upgrades to properties, including solar panels. Adobe Stock

BRADENTON, Fla. – The Federal Housing Administration will begin insuring mortgages on certain properties that include PACE assessments, a major change in federal policy for the popular energy financing program.

The FHA, an agency of the U.S. Department of Housing and Urban Development, said Tuesday that it will insure mortgages and refinanced mortgages on properties with Property Assessed Clean Energy assessments if the obligation is treated like a property tax.

The PACE assessment attached to the home also must not allow the full obligation to have priority status over the FHA mortgage lien, although there can be a claim for past due amounts.

By law, the FHA said it cannot accept a first-lien PACE structure.

PACE programs finance energy-saving upgrades on homes and businesses. The owners repay the cost of the upgrades through a charge on their property tax bills, which runs with the property if it is sold.

Banks oppose the assessments because many programs throughout the country elevate the obligation above mortgages.

Renovate America, a residential PACE program based in California, welcomed the FHA's announcement and said it will expand homeowners' access to renewable energy, energy efficiency, and other home resiliency projects.

"In saying PACE should be treated as any other property tax assessment and not as a traditional loan product, the FHA gives much greater clarity to state and local governments," said the program's chief executive, J.P. McNeill.

PACE originated in California and more programs are offered there than any other state.

The California Association of Realtors said it believes HUD's decision was "ill advised" because the loans remain in a senior position to FHA mortgages.

"Doing so places FHA homebuyers and taxpayers at risk and does homeowners a disservice by approving a loan product without consumer protections and which is aggressively sold to homeowners who rely on FHA financing for safe and affordable mortgages," said CAR President Pat Zicarelli.

While the FHA took a step toward loosening its policy on PACE, it does not apply to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

CAR said it believes that the new FHA policy will cause "confusion and uncertainty" for homeowners, home buyers, and housing market professionals.

PACENation, a national nonprofit organization, applauded the FHA's determination and said the agency's standards will allow energy financing programs now available in 18 states to encourage more homeowners to make energy-saving upgrades.

"This is another critical step forward to make PACE financing available for more home owners so we can achieve our nation's energy goals," said PACENation founder Jeff Tannenbaum.

Billions of municipal bonds backed by the property tax assessments have been approved by courts to finance PACE projects.

Last year, the Florida Supreme Court affirmed the validation of $2 billion in clean energy bonds over challenges brought by the Florida Bankers Association and a former state legislator.

The bonds will be issued by the Florida Development Finance Corp., a statewide conduit agency that has partnered with Renovate America and Ygrene Energy Fund to offer PACE programs in the Sunshine state.

In Louisiana, Alliance NRG last year had planned to institute a PACE program using $225 million of taxable special assessment revenue bonds.

However, the approval of the bonds failed to move forward after objections were lodged by the Louisiana Bankers Association and others, state officials said.

"The implementation of PACE programs create numerous problems and challenges for lenders, and buyers and sellers of property," LBA director of government relations Joe Gendron said at the time. "A major concern is the superior lien position granted to PACE loans due to the fact that they are collected like property taxes."

The structure of the program creates safety and soundness concerns for banks, said Gendron, who added, "PACE programs and loans also are not subject to traditional bank regulation and oversight."

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