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Here’s why the FHA has stopped lending on homes with energy-efficient PACE liens

DEAR MR. MYERS: We bought our home in 2015 with a Federal Housing Administration loan, and then added a new solar-panel system and made some other energy-saving improvements with a PACE loan earlier this year. Now, we’ve heard that the FHA will no longer insure mortgages that have a PACE assessment. So, where does that leave us? Are we going to have to refinance our current FHA mortgage with a non-FHA lender?

ANSWER: Don’t worry. Although the federal government recently announced that it will no longer provide FHA loans on properties that also are encumbered by a PACE lien, the new policy won’t affect homeowners who already have a PACE assessment in place.

PACE loans were created several years ago to fund energy-efficient home-improvements. The various programs are typically operated by local governments but funded by private-sector banks or other companies.

These offbeat loans usually don’t require any monthly payments. Instead, the regularly scheduled payments are tacked on to the borrower’s property-tax bill, and the owner pays them as a line item when their annual or semi-annual bill comes due – just as they would for street improvements and the like.

The repayment process, though, can lead to some serious problems.

The first is that, if the tax bill goes into default and the tax collector must foreclose, the PACE lien must be paid off first from the tax sale’s proceeds. The lender that issued the 30-year mortgage for the borrower to purchase the house earlier would get only “second-dibs” on the proceeds from the sale, which means it would suffer a loss if the property didn’t sell for a price that’s high enough to cover the PACE loan, the original mortgage and related costs.

In many instances, even if sellers with a PACE lien can find a buyer before going into foreclosure, the lien is effectively transferred to the new buyers. The buyers then are obligated to make those payments through their property-tax bills, again putting the bank that issued the purchase mortgage at risk if the buyers default later.

The Federal Housing Administration’s home-loan program is financed by government funds, which means it depends on taxpayer dollars. When the FHA loses money on the sale of a home, all of us do.

FHA acknowledged that fact when announcing its new restrictions on PACE-encumbered properties earlier this month, noting in a statement that the agency “can no longer tolerate putting taxpayers at risk by allowing [lien] obligations like these to be placed ahead of the mortgage itself in the event of a default.”

Most consumer groups applauded the FHA’s decision, but said that the agency needs to go much farther. Their “wish list” includes a lower cap on the rate that PACE lenders can charge, better state and federal regulation, and a ban on contractors and salespeople who make unfounded promises that the cost of the owner’s energy-saving improvements will soon be recouped through lower monthly utility bills.

REAL ESTATE TRIVIA: Before the FHA was created in 1934, most home loans carried a payback term of only three to five years. A lump sum in cash to pay off the loan was then due, and the term “refinancing” hadn’t even been invented yet.

DEAR MR. MYERS: What is a “one-hour door”?

ANSWER: It’s a fire-resistant door that can hold back a blaze for a minimum of 60 minutes. Some manufacturers and builders also offer one-hour walls.

DEAR MR. MYERS: My kids and I drove across the country for our fall vacation this year and passed through a town in Texas called “Turkey.” We didn’t see any turkeys there. What gives?

ANSWER: There still are some turkeys around there, even if you didn’t see them. The town (population: 400) in the Texas Panhandle was named after settlers in the 1890s, who were greeted by huge flocks of the big birds from nearby Turkey Creek.

The tiny town is best-known as the home of the late country singer Bob Wills, the “King of Western Swing.”

Turkey also is one of the more than 100 U.S. towns whose names might have appeared in your holiday feast. If you enjoyed a smaller dinner, you might want to visit Chicken, Alaska. Or you might want get a nice slab of ham in Pig, Kentucky.

No great meal can begin without an appetizer. Start with a fruit plate from Citrus Heights, California, and cheeses from the fine cities of Colby, Wisconsin and Monterey, California. They’re good with a glass of bubbly from Champaign, Illinois.

A crisp green salad would be nice, which is where Cucumber, West Virginia comes in. Top it with the zesty red dressing of Catalina, the tiny island city off the coast of Southern California.

Of course, you’ll need to have some side dishes to complement the entree. Corn, Oklahoma, would be a good place to start. Or maybe Spuds, Florida; Rice, Texas; or Fries, Virginia.

Dessert could come from Cookietown or Pietown, both in New Mexico. They also make terrific sweet treats in Sugar Land, Texas. Wash them down with a cup of java from Hot Coffee, Mississippi, or a spot of Tea, South Dakota.

David W. Myers’ column is distributed by Cowles Syndicate Inc.

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