Best-Kept Secret in the Mortgage Industry
Improving the energy performance of a home is an economically sound investment. Yet despite its economic attractiveness, home performance in the United States is nowhere near optimal levels. Why is this? In most cases there is an incremental added cost to improve a home’s performance, and many Americans resist the first cost even at the expense of positive cash flow in the future. To address this first-cost barrier, the mortgage industry has developed the energy mortgage.
There are two types of energy mortgage. An Energy Improvement Mortgage finances the energy upgrades of an existing home in the mortgage loan based on future monthly energy savings. An Energy-Efficient Mortgage uses the energy savings from a new energy-efficient home to increase the home-buying power of the consumer and capitalizes the energy savings in the appraisal. The entire U.S. secondary mortgage market (Fannie Mae, Freddie Mac, VA and FHA) offers energy mortgages.
In the past, lenders haven’t promoted energy mortgages because they require too much paperwork. Lenders have also complained that the energy mortgage was too complicated for the loan applicant. But, like the rest of the economy, the mortgage industry is fast becoming computerized. Thanks to Fannie Mae’s leadership, issuing energy mortgages is now a seamless transaction for the mortgage industry. In fact, the large secondary mortgage market has incorporated the energy mortgage into its Desktop Underwriter automated program. Now a lender has only to type two numbers into two fields and the program does the rest.
The old energy mortgages merely adjusted the debt-to-income loan ratio in order to credit energy savings, and this was something that loan applicants didn’t understand intuitively. Now the entire secondary mortgage market shows monthly energy savings as added income in calculating eligibility for a loan for a new home, and the energy value of the home is added to the appraised value of an existing home. It’s now much easier for home sellers and loan applicants to see energy savings in their bottom line.
Yet despite these changes, consumer response to energy mortgages has still been disappointing. This is because most consumers and most members of the housing industry are not aware of the benefits and simplicity of energy mortgages. Donald Lange, past president of the Mortgage Bankers Association, says, “Energy-efficient mortgages are the best-kept secret in the mortgage industry.” Another barrier to greater consumer use of energy mortgages is the fact that the value of energy efficiency is discounted in these mortgages, understating the true value of those savings, and making the boost to consumer buying power seem smaller than it is.
Plan of Action
The organization that I direct, the Residential Energy Services Network (RESNET), believes that the energy-efficient mortgage has the potential to serve as a key for financing the energy performance of a home at the time of sale or refinancing. Energy mortgages enable consumers to increase the energy performance of the home they are buying or refinancing—and to do so at a price they can afford. But consumers must be made aware of these products’ potential. It’s time to get the word out on this best-kept secret in the mortgage industry.
And to more fully realize the potential of energy mortgages, the energy mortgage program needs to be revised to fully capture the value of monthly energy savings. This means overcoming an important barrier to the increased use of energy mortgages—the discounting of energy efficiency in current mortgage products. To this end, the RESNET board of directors has recently adopted a policy statement:
RESNET urges the federally sponsored secondary mortgage market to change their calculation of housing costs to include principal, interest, taxes, and insurance minus energy savings, with the energy savings coming from a certified home energy rating.
This would increase the importance of energy efficiency by putting it on par with principle, interest, and insurance costs in determining the housing costs used when someone is qualifying for a mortgage loan, assure that energy savings are real and accurately predicted, and also support the home energy rating industry.
Steve Baden is the director of RESNET.
For more information:
In order to help more people take advantage of energy mortgages, RESNET has posted a special page on its Web site, Lender Information (www.natresnet.org/lender). The page provides the housing industry with the information they need to understand these mortgages. It contains links to a summary of all the energy mortgage products, and the underwriting guidelines for these products.
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