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PACE Loan’s Default Challenges

GSE loansThe Federal Housing Finance Agency (FHFA) is requesting input on residential energy retrofitting programs financed through special state legislation enabling a “super-priority lien” over existing and subsequent first mortgages. The FHFA is particularly interested in input on potential changes to its policies for its regulated entities based on safety and soundness concerns, also known as Property Assessed Clean Energy (PACE).

In an article on Mondaq, Mayer Brown’s Kristie D. Kully and Joy Tsai discussed the challenges PACE poses, notably following default.

“The priority lien status of a PACE loan may erode the value of a lender's or investor's security interest if the borrower defaults,” Kully and Tsai said. “Additionally, it is not always easy for a lender, when considering whether to make a new mortgage loan, to determine whether a property currently has a PACE lien. The FHFA indicates that the loans are not recorded in local land records and thus are not part of ordinary mortgage record searches. Instead, the liens are discoverable through tax records and may not be clearly denominated. Even though standard first-lien mortgage instruments generally prohibit a homeowner from granting a superior lien, that has not prevented homeowners from obtaining super-lien PACE financing.”

As part of its request for input, the FHFA wants to know if it should direct the GSEs to decrease loan-to-value ratios for all new loan purchases in states or in communities where PACE loans are available, and by how much. The FHFA is asking respondents if servicers of mortgage loans for Fannie Mae and Freddie Mac should provide an annual or more frequent notice to existing borrowers in PACE-eligible communities informing them that, under the terms of their mortgage, PACE liens are not permitted.

The FHFA also asked for input on other actions regarding standards for the Federal Home Loan Banks accepting eligible advance collateral mortgage loans in communities where PACE loans are available, and how these standards best address the increased risk of such collateral.

Written responses to the FHFA must be received by March 16, 2020. The complete Request for Input, including instructions on how to respond, can be found here.

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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