The role of
information on
energy costs in
mortgage
underwriting
October 5, 2011 | Resources for the Future
First Wednesday Seminar
Can Creative Financing Programs Close the
Energy Efficiency Gap?
Cliff Majersik
Executive Director, IMT
cliff@imt.org
www.imt.org
The Energy Efficiency Market Challenge
Building green and energy efficient
buildings must be profitable to be
mainstream
Green homes are worth more, but
they don’t always sell for more
Many home buyers won’t pay more
for “green” per se, but will pay if
they will see a good cash-on-cash
return
Appraisers and lenders can derail
good green projects by not valuing
green.
Developments in Energy Efficiency Financing
HUD/FHA PowerSaver Loan
•
•
•
Based on FHA Title I home improvement
loan
Up to 20-year, $25,000 loan at interest rates
between 5-7%
Lender retains 10% or risk
Energy Efficient Mortgage
•
•
•
FHA 203(b) Energy Efficient Mortgage
Fannie Mae and Freddie Mac
Veteran’s Administration
State, Local & Utility Programs
•
•
•
PACE
Better Buildings
On-bill financing
Bottom Line: Confusing array of (good)
niche products have won little mind share
from borrowers or lenders
Energy “blind spot” in mortgage eco-system
Consumer
Markets
(MLS)
• Most MLS lack fields for energy
efficiency features or ratings
• Prospective buyers/tenants don’t
have access to data on home’s energy
efficiency
Appraisal
• Lack of appraiser
awareness or expertise
• Little market data or
“comps” to support their
valuation estimates
Mortgage
Underwriting
• Key underwriting tests
(DTI, LTV) exclude
energy costs
Mortgage ecosystem inhibits price premium for
energy efficiency
Barriers to Energy Efficiency in Appraisals
Appraisers often ignore energy costs completely, or treat
them as constant across all properties – reasons include:
Dismissal of energy’s
importance
Lack of information
Lack of expertise
Mistrust of data provided
by owner
Lack of client (lender)
mandate
Lack of time
Courtesy of Flickr user: glennharper
Energy Efficiency in Mortgage Underwriting:
A homeowner who spends less on
utilities will have more money to
make mortgage payments
For a typical house :
o
o
Median home price - $175,000
Average 30-year commitment to
energy costs - $70,000
Energy costs are regularly
excluded from mortgage lenders’
eligibility tests used to determine a
borrower’s ability to pay a monthly
mortgage payment (debt-toincome - DTI) and the collateral
value (loan-to-value - LTV) .
Energy Efficiency in Mortgage Underwriting:
Consider a family with two choices:
Energy
Efficient
Home A:
Home B:
Home price $300,000
Home price $305,000
Mortgage payment
Utility bills
Total monthly
$1,600
$300
$1,900
Mortgage payment
Utility bills
Total monthly
$1,627
$150
$1,777
Existing underwriting standards would make the energy efficient home
look more “risky” and perhaps deny the consumer a loan on Home B.
Solutions – Needed Action
1. Conduct research to explore correlation of energy
expenses to loan performance
New ACEEE study: unsecured energy efficiency loan
programs have an average default rates of only 0-3%
2. Collect energy (and transportation) expenses on
new loans at loan origination to permit analysis
as loans season.
3. “SAVE Act” – Draft legislation that would require
federal loan agencies to consider energy expenses
in single family mortgage underwriting.
The SAVE Act: Sensible Accounting to Value Energy
Draft legislation that would require federal loan agencies to consider
energy expenses in single family mortgage underwriting.
“With the new Congress and political dynamic,
it was important to figure out policies and bills
that we thought were not only good, but realistic
given the fiscal constraint…[This bill] promotes
efficiency and transparency while not costing
the taxpayers anything."
- Ross Eisenberg, U.S. Chamber of Commerce
www.imt.org/SAVE-Act
The SAVE Act: Sensible Accounting to Value Energy
Capacity:
The SAVE Act would add estimated energy costs to the criteria
accounted for in the Debt-to-Income Ratio:
The SAVE Act: Sensible Accounting to Value Energy
Collateral:
SAVE Act would give underwriters the option of adding the
present value (NPV) of the energy savings to the appraised value
when calculating the loan-to-value ratio:
+
NPV of energy
savings
Bottom Line:
High performance buildings are more profitable
Thank you!
For more information, please visit
www.imt.org/residential-finance
or contact
Cliff Majersik
Executive Director, IMT
cliff@imt.org
Outline
1. A
2. B
3. C
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