WASHINGTON – Dec. 11, 2017 – The Department of Housing and Urban Development will no longer allow financing on properties where energy efficient improvement liens will remain in place.

On Title II forward mortgages that are insured by the Federal Housing Administration, HUD began allowing financing of homes with Property Assessed Clean Energy loans last year.

But FHA is concerned that the priority lien status of PACE loans in the event of a default has the potential for increased losses to its Mutual Mortgage Insurance Fund.

So HUD issued Mortgagee Letter 2017-18 on Thursday indicating that FHA is making changes to its requirements.

According to the notice, properties encumbered by PACE obligations will no longer be eligible for FHA-insured forward mortgages.

But the letter clarified that PACE obligations are considered existing debt and can be paid off using a rate-and-term refinance. HUD's current policy that allows cash-out refinances to be used to pay off PACE obligation is staying in place.

HUD said that its existing prohibition of home-equity conversion mortgages on PACE-encumbered properties is unchanged.

"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," the letter stated.

The changes go into effect for case numbers issued 30 days after the mortgagee letter was issued.

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