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 Programs Close the Energy Efficiency Gap? 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 Lack of appraiser awareness or expertise Little market data or comps to support their valuation estimates Appraisal 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 Median home price - $175,000 o 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: 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.
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
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