Energy Efficient Homes Reduce Risk of Mortgage Default

Bloomberg BNA -- An energy efficient home can make the difference between foreclosure and maintaining mortgage payments, according to a new report.

The March 19 anaysis, Home Energy Efficiency and Mortgage Risks, produced by the Chapel Hill Center for Community Capital at the University of North Carolina and the Washington, D.C.-based energy conservation advocate Institute for Market Transformation (IMT), is the first academic study to investigate the connection between energy efficiency and the ability to repay a mortgage. The risk of mortgage default is one-third lower for energy-efficient, Energy-Star rated homes, according to a March 19 statement accompanying the report.

“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” Cliff Majersik, executive director of IMT, said in the statement. “We long believed this to be the case, and now this study proves it. Successful housing market reforms will require reconsidering the risk factors in mortgage default, including energy costs.”

Robert Sahadi, director of energy efficiency finance policy at IMT, told BNA March 27 that the study provided a response to people in the mortgage industry, who were saying “show me.”

Asked if energy savings are really enough to keep a homeowner solvent, Sahadi said yes. Estimating a monthly savings of $250 for someone with an income of $4,000 a month, he said it doesn't appear to be a great deal of money. But after factoring in the household financial obligations, “that $250 as a percent of what is left could be 25 to 50 percent for a more moderate income borrower,” he said.

Energy efficiency has become a high priority among consumers. According to a late February National Association of Home Builders study, 90 percent of home buyers would select a home with energy efficient features, and even pay another 2 to 3 percent of costs, to permanently lower their utility bills.

“The $4 a gallon for gasoline, I think, [has] made people conscious of energy costs,” Sahadi said. “Younger people are starting to look at this.”

Another aspect of the study that might be equally important, Sahadi said, is that people who live in energy efficient homes are staying in them longer. “The thought here is that people that are buying energy efficient homes are looking at a longer time horizon in their home.” Therefore, they are looking more carefully at the cost of maintaining that home, he said.

Sahadi said equipping new homes with energy saving features is the easier proposition, and almost 40 percent of new construction is already related to energy efficiency. Financially, it represents an approximate 3 percent to 5 percent price bump, Sahadi said.

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On the retrofit side, he said, the job creation benefits would be significant. People would be hired to replace the furnace, attic insulation, and quite possibly the windows. “We did an analysis about 18 months ago that showed that even extremely modest increases in the amount of people that would do this for existing homes led to significant employment gains, on the order of 60,000 to 70,000 jobs a year,” he said.

It is the hope of the IMT that energy efficiency will be part of a mortgage underwriter's best practice, but that is largely a matter of finding agreement with the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac. “Right now the lending industry is pretty much a function of GSEs,” Sahadi said. “Ninety-five percent of all single family is going through those agencies, and they are pretty much doing whatever the agency guidelines suggest. So at this point we really have to get those agency guidelines to incorporate energy efficiency.”

The residential sector accounts for 20 percent of what Americans spend annually—estimated to be $230 billion—on non-transport related energy, according to the report. Better energy practices could save up to $41 billion annually, according to research by global management consulting firm McKinsey & Company.

The study advocated factoring this information in as standard practice for lenders when home mortgages are under consideration, and for lawmakers discussing policy.

“We have something called the SAVE Act,” Sahadi said. The bill, S. 1737, which advocated legislation to improve the accuracy of mortgage underwriting by factoring in energy costs, was introduced to the 112th Congress on Oct. 19, 2011, by Sens. Michael Bennet (D-Colo.) and Johnny Isakson (R-Ga.), and referred to the Committee on Banking, Housing, and Urban Affairs. It called for the inclusion of energy efficiency into federally guaranteed mortgage underwriting. “It just sort of died on the vine,” Sahadi said. “It will be hopefully reintroduced in this Congress soon.”

The biggest obstacle to creating more energy efficient homes, Sahadi said, has been the cost to homeowners. Generally, he said, those earning a middle income and above find the resources, but those below that have a hard time under the current conditions. “Even middle income buyers in high-cost areas?…?are hard-pressed to come up with even that extra 3 to 5 percent,” he said. “The other factor is, this debt-to-income ratio is a key underwriting variable. So, to the extent you pay that little more, your debt-to-income goes up and that starts to work against you in the underwriting analysis.” What advocates would argue, he said, is that debt-to-income ratio should be adjusted for the energy savings. “You have your same debt load, but on the other hand?…?your energy bill, which is not included in the debt-to-income ratios, is $200 to $250 less. And that should be factored in.”

Asked about the impact if energy efficiency becomes a real estate and underwriting best practice, Sahadi said, “The household consumes a good percent[age] of our domestic energy, something like 20 to 25 percent of it. So if you could bring that number down?…? then we will be making our existing housing stock better.”

“We'll be?…?less dependent on foreign energy sources,” Sahadi said. “Hopefully, we are more in a realistic mode. We can't be building highways out to forever and we can't be building all this infrastructure. We can't be the disposable nation that we have historically been.”

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