Can We Make our Homes Energy Efficient without Radical Changes to Lending Practices? Part 2

homeeemortgagecoverIn the first blog on this topic, I gave an overview of the UNC Center for Capital Research Report – Home Energy Efficiency and Mortgage Risks.

This second blog addresses the Report’s findings regarding financing energy efficiency and the challenges that face consumers when seeking additional dollars to make energy upgrades in their homes.

According to the Report, the U.S housing stock is valued at about $14.5 trillion. To even devote 2% to energy efficiency improvements would require an investment of nearly $300 billion.  While there are federal, state and local energy efficiency loan funds and other mechanisms in place to provide assistance, they can’t possible cover what is required.

The most widely used mechanism is direct borrowing in the form of consumer loans, home equity loans and traditional or specialized mortgages.  Most of these financing options require consumers to have either substantial equity in their existing home, the personal reserves to pay any added costs out-of-pocket or larger down payments for a home purchase. Many homeowners have seen the equity in their homes diminish over the last few years due to the struggling economy. 

For many first-time homebuyers or moderate-income borrowers who do not have these financial resources there are energy-efficient mortgages (EEM) which offer lenders flexibility in the debt-to-income and other underwriting considerations so borrowers can qualify for larger loans or lower interest rates. However, few lenders currently offer these.

If we are going to see significant improvement in the retrofitting of existing buildings for energy efficiency, owners need to be incentivized. This usually manifests itself as access to affordable capital.  While it is a good start, it is not enough to offer tax incentives especially for homeowners who do not have cash resources to make some of the more pricey upgrades to older homes.

This debate is going to Capitol Hill and groups like the Residential Energy Services Network (RESNET) are lobbying to encourage underwriting flexibility on energy efficient homes and to promote energy efficiency to consumers – particularly for moderate- and middle- income borrowers seeking financing for energy efficient upgrades.

It’s apparent that business as usual will not get us where we need to go.  This Report is a reminder of a prevailing situation that continues to be raised but not resolved.  Is there money available that we don’t see?  Are there resources somewhere that could be re-allocated to move the green needle and help moderate- and middle- income borrows obtain the financing needed to make necessary energy upgrades?

We, as consumers, cannot strive to be sustainable nor can cities strive to be the ‘greenest’ cities without resources to make this happen.  Are the gloves off?  Can we really move the needle this time?

Comments
  • I’ve looked up lenders working with EEMs (Energy-Efficient Mortgages) in my state of Pennsylvania and there’s only one (!) in the entire state, curiosuly located in Duluth, GA. I would guess that most lenders shy away from the additional paperwork, the lack of appraisers (a.k.a. raters) that are quialified to certify a home as EnergyStar compliant and probably (I have to assume) much greater costs of appraising as opposed to traditional mortgages. One part of the appraisal/rating that is not clear to me personally (and perhaps some of the lenders are thinking the same way) – once a home is appraised as EnergyStar, does it stay rated for the whole duration of the 30 yrs mortgage? Do the improvements that resulted in the rating have to be maintained and perhaps recertified at some time intervals?

    I can see how EEMs may be helping buyers of new construction homes with big corporate name builders pushing EnergyStar as one of the marketing points, but it’s really hard to see how they can be used in your typical sale or refinancing situation of an existing home.

    Also, rather confusingly, using an EEM (if you can find the lender, of course) would mean that you can borrow up to 85% LTV, not the usual 80%, without requiring insurance, which sounds like an increased risk, not the other way around.

    With all those considerations, I think the government has a huge role to play through both the tax incentives to owners and perhaps some additional incentives for lenders through FannieMae, given that most mortgages ultimately end up there anyway.