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The Federal Housing Administration said Property Assessed Clean Energy loans that help mortgage borrowers finance environmentally friendly home upgrades are subordinate to a first-lien mortgage. The administration also announced a new initiative allowing borrowers to take out higher loan amounts to finance energy improvements.

PACE programs involve local governments providing property-secured financing to property owners for the purchase of energy-related home-improvement projects. Repayment of the amount borrowed is often secured by the property and added to the property tax bill. This security interest creates a lien on the property that subordinates Fannie Mae and Freddie Mac security interests in the property. The Federal Housing Finance Agency has barred Fannie Mae and Freddie Mac from purchasing PACE loans.

However, the administration said it is developing lender guidance that says PACE loans are subordinate to a first-lien mortgage, allowing borrowers with FHA loans to refinance or sell their properties instead of being forced to pay off the PACE loan before getting a new mortgage.

American Banker reported that FHA has had "ongoing conversations with the [FHFA]," but there is no evidence the agency will follow FHA's lead on this move and allow Fannie Mae and Freddie Mac to purchase mortgages with PACE loans attached.

The FHA also launched an initiative this week that would allow borrowers to get larger loans – potentially about 2 percent more than the loan amount – to finance energy improvements in their homes.