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?

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.

Adjusting the Thinking of Lenders

Lucas Hamilton

Lucas Hamilton

As exciting as it is to see Vancouver’s Olympic Village with energy efficient dwellings, long-term green initiatives that will become permanent sustainable features of the community, and the great publicity that provides, sustainable building projects continue to struggle to secure mortgages from lending institutions.

The struggle relates directly to justifying the costs to produce a more energy efficient building and the money saved over the life of the building. From a life-cycle perspective it makes perfect sense and is justified. But from an economic perspective it is more difficult to justify the added costs.  The reality is, on average, mortgages held by lending institutions are sold every seven years.  The banks are not concerned with life-cycle analysis; all they consider is upfront costs.  This becomes a negative when you start talking about creating sustainability. 

The building community needs to help rephrase that discussion. The truth is, in many parts of the country, homes are not built to the 2009 building codes but are built to 2006 or even 2003 codes. Take the average starter home. Building to the most current codes would generate a positive cash flow of $23 per month in energy savings into the homeowners’ hands. Enforcing the code can reduce the size of the mortgage by about 2 percent, which further insures loan repayment. Lenders should prefer that new homes be built to the most current codes, not only for life safety issues but because that saved money can help to repay the mortgage.

For the banks and lending institutions this is a great way to alleviate some of the concerns they have about borrower volatility, because building to the current codes increases borrowers’ income and insulates them from one of the most volatile expenses they have which is fuel costs.

For the average homeowner, energy bills have more than doubled over the last 15 years.  This is largely because of lifestyle. We live in bigger houses with plasma televisions, computers, surround sound systems and many more conveniences.

According to a recent study from Cornell University, if all existing homes and buildings were retrofitted to 2009 building codes–including upgrading systems–and improvements were made to transportation and industry, over the next 10 years we could eliminate 32 quads of energy, which is equivalent to the annual amount of oil imported into the United States. Think about that.

Lucas Hamilton is Manager, Building Science Applications at CertainTeed Corporation.