FHA PowerSaver Loans – a PACE Replacement?
Late last year, the Federal Housing Administration announced a new PowerSaver loan program to provide financing for home energy efficiency improvements. The program comes on the heels of the downfall of residential Property Assessed Clean Energy (PACE) financing, which allowed homeowners to pay back energy efficiency improvements via long-term property tax payments, as well as to pass the payments on to the next homeowner. Can PowerSaver adequately replace PACE?
First, a bit of background on PowerSaver. The loan program is part of FHA’s Title I Property Improvement Program and the basic principle is that the FHA provides loan insurance for participating private lenders who loan to eligible homeowners. Federal insurance provides 90% coverage for the loan, with the lender only accountable for the remaining 10%, with limits on the portion of a lender’s portfolio in the Title I program. Participating homeowners pay a premium equal to 1% of the loan amount multiplied by the loan term. For example, a $10,000 loan financed over 15 years would have an annual premium of $1,500.
Loans are capped at $25,000 with 15 year terms for energy efficiency and 20 year terms for renewable energy investments. A list of eligible improvements can be found here. Borrower’s can only be owners of single-family, detached homes with a 660 credit score and a maximum 45% debt-to-income ratio. Loans under $7,500 can be unsecured, but larger loan amounts must be secured by the first mortgage.
The following table illustrates the major differences between PACE and PowerSaver:
|Backstop||Federal insurance||Local government|
|Credit score||> 660||n/a|
In most cases, the differences make the PowerSaver loan significantly less attractive than PACE financing. A PACE lien came before the mortgage, potentially allowing PACE programs to sell their obligations on the market and allowing local governments to obtain low interest rates. PACE liens did not require credit scores, allowing many Americans with damaged credit (but good property tax payment history) to make their home more energy efficiency and cost effective. Finally, the lien could be transferred between property owners, removing the discontinuity between the lifespan of effective energy efficiency improvements (15 years) and the average stay in one home (5 years).
Perhaps most powerfully, PACE allowed cities and counties to become a hub of energy planning for their communities, whereas PowerSaver simply backstops the private lending market.
FHA should be applauded for expanding the financing options available to homeowners for energy efficiency and renewable energy improvements, but their offering will not provide the same power as PACE.