In turnaround, FHA will insure mortgages with PACE assessments

(Reuters) - The Federal Housing Administration on Tuesday said it would approve mortgages on properties with energy-related home improvements financed through special tax assessments, marking a turnaround for the agency.

Property Assessed Clean Energy (PACE) obligations allow homeowners to finance energy-efficient upgrades and renewable energy systems and repay the cost through extra charges on their property tax bills. But banks dislike PACE loans because they take precedence over mortgage debt in the event of a default, upending a basic tenet of the market.

Lenders argue that a big attraction of PACE financing is that it is attached to the property, allowing homeowners to pass it on to subsequent owners.

On Tuesday, FHA said it would insure mortgages with PACE assessments that are subordinated to the mortgage lien. However, PACE loans will retain a first-lien position on foreclosed properties or for delinquent PACE obligations.

The FHA announcement was part of a broader government effort the White House unveiled on Tuesday to expand renewable energy and efficiency options to low- and middle-income communities.

Providers of PACE financing cheered the move, calling it a validation of the growing program.

“This is the first specific federal policy endorsement of PACE,” J.P. McNeill, chief executive of PACE loan provider Renovate America, said on a conference call with reporters.

But real estate agents urged FHA to reconsider the policy, saying the existence of a PACE assessment would make a foreclosed property harder to sell.

“We’re already experiencing tight lending standards that keep qualified buyers out of the market, and today’s announcement givens lenders another reason to withhold mortgage credit on otherwise desirable properties,” National Association of Realtors President Tom Salomone said in a statement.

PACE lending has spawned a niche market for bonds backed by PACE obligations, but its growth has been hampered by opposition from government housing agencies like the FHA and the Federal Housing Finance Agency.

In 2010, the FHFA directed mortgage finance giants Fannie Mae and Freddie Mac not to buy mortgages on properties with PACE liens, limiting the saleability of such homes.

The FHFA is yet to change its stance.

Reporting by Nichola Groom and Will Caiger-Smith; Editing by Cynthia Osterman