Can We Make our Homes Energy Efficient without Radical Changes to Lending Practices? Part 1

homeeemortgagecoverA recent study by the University of North Carolina Center for Community Capital/Institute for Market Transformation puts forth some very interesting data regarding energy efficient home building, mortgage lending and the state of the lending industry. This report, Home Energy Efficiency and Mortgage Risks has some interesting findings that I plan to address in a few blogs.

The study includes:

  • National sample of 71,000 home loans from 38 states and the District of Columbia
  • Variables examined for the homes included age of the house, square footage, FICO (credit) scores, ZIP code average incomes and unemployment rates, typical time to default, sale price, heating/cooling degree days and electricity prices 
  • Average home price in sample was $220,000

The study finds that default risks are on average 32 percent lower in energy-efficient homes.  There is, perhaps, a mixed message in this premise.  We have seen over the last decade that the early adopters of energy efficiency are more educated, probably make more money and most likely live in more urban locations. People in more rural parts of the country may not have local resources for information or education about energy upgrades and may not have access to capital from lenders to make these upgrades.

The study says that the amount of money homeowners spend on energy annually equates to 15 percent of the cost of home ownership. While these costs vary around the country, rural households pay $400 more on average than urban household. There could be many reasons for this. Is it the nature of construction?  Is it utility costs?  

Are the resources to make energy improvements to these homes available?  We have blogged before about the fact that if you have a home built prior to 1980 you should consider energy upgrades and if you are refinancing include them as part of your lending conversation.

The heart of the problem lies in the valuation of homes and the lack of information regarding mortgage lending options.

Think about it. Is your home worth more or less than it was five years ago? Slim chance of any “magical” home equity showing up to be cashed in and spent on upgrades.

The only way we can move the needle to upgrade existing homes and buildings so they are more efficient is to rationalize the underwriting process and include energy upgrades as part of the mortgage.

Stay tuned. There is more to come on this study.  If you have any thoughts on this subject, I would love to hear them.

Comments
  • It is very true that valuation is very important in lending. But as it happens, the most efficient energy upgrades such as added attic insulation, wrapping exterior walls, radiant barriers, pretty much any building shell energy improvement is very often ignored (overlooked at best) by appraisers. I’ve just recently had two separate experiences with appraisers. When I pointed out a passive energy upgrade done at the property (improved attic insulation and a radiant barrier in another case), they simply shrugged their shoulders dismissing it as irrelevant to the appraised value.

    Perhaps windows upgrade might have been noticed, but any other passive energy improvement is usually hidden up in the attic or in the basement and is rarely if ever considered when the sales price is negotiated. And that’s what the appraiser is looking for: what is the reasonable price the bank can get for this house if you default on your loan and they have to foreclose. Apparently, energy upgrades are not expected to add any value to a house that goes under short sale.

    So, yes, I think it’s unfortunate but it would not be wise to assume that energy improvements will add anything to the home equity. They will add to the enjoyment of living in the house for sure, and that’s the only reason to do them.

    Also, I haven’t been involved in an appraisal of a property with solar panels yet, but I have a feeling that they (and perhaps solar water heaters) might have been noticed and become a part of the equity simply because they are so visible and in-your-face that neither the appraiser nor a prospective buyer can overlook them. That despite the fact that they are nowhere near the cost per benefit efficiency of a simple attic insulation upgrade.

Leave a Comment