The SAVE Act: Sensible Accounting to Value Energy. RESNET 2012 Conference. February 28, Leading Builders of America

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Lionel Montgomery
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1 The SAVE Act: Sensible Accounting to Value Energy RESNET 2012 Conference February 28, 2012 Ken Gear, LBA Robert Sahadi, IMT Leading Builders of America Institute for Market Transformation

2 LBA Member Companies Ashton Woods Beazer Homes D. R. Horton Drees Companies Hovnanian Companies KB Home PulteGroup Lennar Corporation M/I Homes M.D.C. Holdings Meritage Homes Perry Homes Ryland Group Shea Homes Taylor-Morrison Toll Brothers David Weekley Homes Weyerhaeuser Real Estate Co. Standard Pacific Homes Woodside Homes

3 Energy Efficiency: A Convergence of Market Forces Consumers want it Technology enables it Regulators demand it

4 Builders are committed to Energy Efficient Building Increased consumer awareness Green building has grown from 2% of the market in 2005 to 17% in 2011 Despite the downturn energy efficiency is growing with tremendous opportunity for additional growth Marketing energy efficiency is effective sales tool

5 The Existing Home Challenge Foreclosure crisis has heightened the need for policies that promote sustaining not just attaining homeownership. Existing stock of nearly 130 million homes in the U.S. in need of retrofit. Consumers are discouraged from a financing standpoint from making energy efficient improvements in their homes. Energy costs are a major risk to the consumers ultimate sustainability of their homes.

6 Impediments to Progress Consumers resistant to trade-offs Mortgage underwriting guidelines don t allow energy savings to be leveraged Appraisal process does not consistently or accurately value energy saving features

7 Aligning mortgage policy with energy efficiency Energy costs now exceed property taxes and insurance, which are accounted for in mortgage underwriting. A homeowner who spends less on utilities will have more money to make mortgage payments

8 Mortgage Underwriting: Borrower capacity is adjusted for energy costs. Value of the home reflects the energy cost savings. The Three C s of Underwriting Credit Capacity Borrower s ability to pay the monthly mortgage Debt-to-Income Test Collateral Appraised value of the home Loan to Value Ratio Energy blind spot

Capacity: Lender use a series of eligibility

9 Capacity: Lender use a series of eligibility tests to determine the borrower s ability to pay a monthly mortgage payment. Energy costs are regularly excluded from these tests. New approach would add estimated energy costs to the criteria accounted for in the Debt-to-Income Ratio:

10 Collateral: Residential appraisers rarely account for energy efficiency: o o o Lack of awareness, expertise, incentives Appraisers rely on comps Little agreement on how to value energy efficiency. New approach would give underwriters the option of adding the NPV of the energy savings to the appraised value when calculating the Loan-to-Value ratio: + NPV of energy savings

11 Consider a family with two choices: Home A: Home price $300,000 Home B: Home price $305,000 Energy Efficient Mortgage payment $1,600 Utility bills $300 Total monthly $1,900 Mortgage payment $1,627 Utility bills $150 Total monthly $1,777 Existing underwriting standards would make the energy efficient home look more risky and perhaps deny the consumer a loan on Home B.

12 Industry Environment WHY NOW? Rising energy costs rising could be a major destabilizing force The share of new homes being built energy efficient is growing, but the overall market is below optimal levels. Huge inventory of unsold homes in need of repair. Paradigm shift in loan quality standards. Regulatory overhaul of mortgage market. Employment stimulus needed at the local level.

13 The SAVE Act: S Has gained the support of leading business, industry, and environmental support the proposal. This coalition includes:

14 Next Steps Legislation has been introduced this session SAVE Act has bi-partisan support Education process already underway Seeking co-sponsors and endorsements Constituent support needed

15 For more information, please visit or contact Ken Gear, LBA Robert Sahadi, IMT

The role of information on energy costs in mortgage underwriting

The role of information on energy costs in mortgage underwriting October 5, 2011 Resources for the Future First Wednesday Seminar Cliff Majersik Executive Director, IMT cliff@imt.org Can Creative Financing