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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.

The National Association of REALTORS® (NAR) is asking all REALTORS® across the country to TAKE ACTION NOW and urge your Senators to pass H.R. 3700, the “Housing Opportunity Through Modernization Act of 2016.” This bill makes needed reforms to the Federal Housing Administration (FHA) condominium loan program, federal-assisted housing programs and Rural Housing Service loan programs. The reforms would make buying a condominium easier by expanding opportunities for first-time homebuyers and streamlining rural housing programs for low-income rental residents.

Early in February the U.S. House of Representatives voted unanimously to advance legislation that will expand opportunities for homeownership, especially for first-time home buyers. H.R.3700 takes aim at the difficulties in getting mortgages for condominiums. NAR has supported the inclusion of reforms to current FHA restrictions on condominium financing.

Condominiums are among the most affordable homeownership options for first-time home buyers, as well as lower income borrowers, but barriers to safe, affordable mortgage credit for condos still exist. H.R. 3700 takes a number of steps to address those concerns. These include efforts to make FHA’s recertification process “substantially less burdensome,” improving a process that is often costly and which condo developments must repeat every 24 months.

H.R. 3700 also lowers FHA’s current owner-occupancy requirement (the number of units in the development owned by the people living in them) from 50 percent to 35 percent and requires FHA to replace existing policy on transfer fees with the less restrictive model already in place at the Federal Housing Finance Agency.

Additionally, the bill streamlines the process for exemptions to FHA’s rule requiring that condominium projects have no more than 25 percent of the space dedicated to commercial use. This effort is in line with the Department of Housing and Urban Development’s initiative to promote neighborhoods with a mix of residential housing, businesses and access to public transportation, which has become a trend in housing development today.

Finally, H.R. 3700 includes further support for rural housing loans and multifamily housing initiatives.

H.R. 3700 removes a burdensome and expensive FHA condo approval process, reduces the FHA restrictions on the number of condos available to homebuyers, and permanently streamlines the Rural Housing Service loan program.

NAR is encouraging all members to take action even if they do not do business with condominiums or in rural areas. SILVAR members can take action by going to


Due to the government shutdown, many federal government offices remain closed, and a number of government programs, including some that impact federal housing and mortgage programs, are suspended or experiencing delays due to the lapse in government funding. REALTORS® say if the government shutdown is prolonged, it could hurt the housing market recovery.

“Since the IRS is closed, lenders cannot verify buyers’ incomes. Government-backed loans, including FHA loans, will be delayed. Delays in processing would ultimately stall home sales,” explained Carolyn Miller, president of the Silicon Valley Association of REALTORS®.

California Association of REALTORS® Vice President and Chief Economist Leslie Appleton-Young said if the shutdown continues there could be dire consequences. “We are operating in a global economy, where everything is interconnected. The greatest concern is if nothing is resolved by October 17 and Congress fails to raise the debt ceiling.”

If Congress fails to raise the debt ceiling, the nation would default on its debt. Mortgage rates would soar, housing affordability would drop, and potential buyers would pull back from the housing market, which is just recovering from the recession.

The Office of Management and Budget requires each agency to have contingency plans in place in the event of a government shutdown. The information below is based on the National Association of REALTORS®’ review of agency contingency plans.

Federal Housing Administration (FHA)
FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities, including paying claims and collecting premiums. Management & Marketing contractors managing the REO portfolio can continue to operate. Expect some delays with FHA processing.

VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program, but expect some delays.

Flood Insurance
The National Flood Insurance Program will not be impacted by a government shutdown, since the program is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.

Rural Housing Programs
Lenders will not receive approvals for U.S. Department of Agriculture programs during the shutdown because field office staff who typically issue conditional commitments, loan note guarantees and modification approvals are on furlough due to the shutdown. If the lender has already received a conditional commitment from the Rural Development office, the lender may proceed to close those loans during the shutdown since the funds were already set aside. A conditional commitment, which is good for 90 days, is given to a lender once a USDA underwriter approves the loan.

Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will the Federal Housing Finance Agency, since they are not reliant on appropriated funds.

The Making Home Affordable program, including Home Affordable Modification Program (HAMP) and Home Affordable Foreclosure Alternatives (HAFA) program, will not be affected since the programs are funded through the Emergency Economic Stabilization Act, which is mandatory spending, not discretionary.

Internal Revenue Service
The IRS is closed and has suspended the processing of all forms, including tax return transcripts (Form 4506T), which are required for many kinds of loans, including FHA and VA, so expect delays.

Social Security Administration
The Social Security Administration is closed and has suspended most customer service functions. Verifying Social Security numbers through the SSN Verification Service will also be suspended during the shutdown, a further complication for mortgage processing.

The Federal Housing Administration (FHA) is raising its mortgage insurance premiums (MIP) and changing MIP cancellation policies. These changes may impact first-time home buyers, but they are needed to mitigate risk and strengthen the solvency of the mortgage insurance fund.

FHA faces financial problems stemming from losses on reverse mortgages and forward loans sustained during the housing crisis and low home values, causing a shortfall in its reserves. There is talk that FHA may need a government bailout of $943 million in tax payer funds.

Traditionally, FHA loans should make up between 10 and 15 percent of the market. In 2012, due to the economic downturn and absence of a robust private lending market, FHA insured over 25 percent of all homes purchased in that year. The National Association of REALTORS® (NAR) says had FHA not stepped in to fill the market void, many families would have been unable to purchase homes, housing values could have dropped an additional 25 percent, and the country would be much further from a recovery.

Facing multibillion dollar losses, FHA has taken a number of steps to shore up funds. Beginning April 1, 2013, FHA’s annual mortgage insurance premium for all new loans that are less than or equal to $625,500 and with a loan-to-value (LTV) ratio greater than 95 percent will be 1.35 percent of the loan amount. The loan to value ratio is calculated as the percentage of the value of the house that is paid for by the loan.

FHA will also require most borrowers to continue paying annual premiums for the life of their mortgage loan. Effective June 3, 2013 FHA will require borrowers who take out a new FHA loan with an LTV ratio of greater than 90 percent to pay the MIP until the end of the mortgage loan term or for the first 30 years, whichever comes first. With an LTV equal to or less than 90 percent, the MIP will be assessed until the end of the mortgage term, or for the first 11 years, whichever occurs first. Previously, once the loan was paid down to 78 percent of the original value of the house or after five years, whichever came later, the borrower would no longer be required to pay the MIP.

FHA insured loan limits are currently calculated at 125 percent of the local area median home price, up to a maximum of $729,750 in highest cost markets like Silicon Valley. The limits are temporary and set to expire at the end of 2013 to 115 percent of local area median home prices with a cap of $625,500. There are discussions in Washington of lowering this amount further, however nothing has been established yet.

In Silicon Valley, where home prices are some of the highest in the nation, many buyers are borrowing at the top of the FHA limits. The MIP can amount to hundreds of dollars each month, in addition to their regular mortgage payment. For instance, buyers with a $600,000 FHA-backed mortgage who put 8 percent down will pay at the 1.35 percent rate, which comes out to well over $600 per month in mortgage premiums. Whereas previously, this additional payment would have been eliminated once the LTV ratio hit 78 percent or five years, whichever was later, now this payment will be assessed for the life of the loan.

FHA also will require lenders to manually underwrite loans for which borrowers have a credit score below 620 and a total debt-to-income (DTI) ratio greater than 43 percent. Also announced, but not yet approved, is a proposal by FHA to increase the minimum down payment requirement for mortgages with original principal balances above $625,500 from 3.5 to 5 percent.

A higher down payment requirement could impact millions of first-time home buyers. Many first-time home buyers rely on FHA-insured loans because they can require a down payment as low as 3.5 percent. In 2012, more than four out of every 10 first-time buyers purchased their homes with an FHA-insured mortgage. It remains to be seen whether these numbers will go down with the new higher rates and requirement that mortgage insurance be paid for the life of the loan.

NAR supports legislation that strengthens FHA’s fiscal solvency and that balances the need to protect the fund from tax payer risk with the need to continue providing access to safe and affordable mortgage financing. While these changes may be necessary in the short-term to help stabilize the FHA fund, NAR’s position is that higher fees make it difficult for first-time buyers to purchase a home, as well as repeat buyers who are relocating from less expensive to higher cost areas. NAR has encouraged FHA to reconsider the need for these changes when the fund returns to full capitalization.

July 2022


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