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The Department of Housing and Urban Development (HUD) has announced that the Federal Housing Administration (FHA) will no longer insure mortgages on homes that carry Property Assessed Clean Energy (PACE) loans.

The PACE program allows homeowners to borrow money to finance energy upgrades for their home. The loan is then repaid as a surcharge on the property tax. The loan travels with the house and is transferred to the buyer upon purchase.

Though PACE loans are a way to finance important energy upgrades, such as double-pane windows, insulation, solar panels, etc., they have some very real risks. The PACE loan takes primary position to the mortgage. If a homeowner takes out a PACE loan without finding out whether their mortgage holder allows them to do so, they could be in automatic default of their mortgage. They may also have difficulty refinancing or selling their home if the new mortgage holder does not allow for PACE loans. Under these situations, they would need to pay off the loan in full before proceeding.

Last year, HUD announced that the FHA would begin insuring mortgages that carry liens created by the PACE program. The decision was reversed last week because the FHA has become concerned about the impact of the PACE liens and potential losses to the FHA’s flagship fund, the Mutual Mortgage Insurance Fund, due to the priority lien status given to these assessments in case of default and the lack of consumer protections associated with the origination of the PACE assessment.