Legislation puts energy into underwriting
When you apply for a mortgage to buy a house, how often does the lender ask
detailed questions about monthly energy costs or tell the appraiser to factor
in the energy-efficiency features of the house when coming up with a value?
Hardly ever. That’s because the big three mortgage players — Fannie Mae,
Freddie Mac and the Federal Housing Administration, who together account for
more than 90 percent of all loan volume — typically don’t consider energy
costs in underwriting. Yet utility bills can be larger annual cash drains
than property taxes or insurance — key items in standard underwriting — and
can seriously affect a family’s ability to afford a house.
A new, bipartisan effort on Capitol Hill could change all this dramatically
and for the first time put energy costs and savings squarely into standard
mortgage underwriting equations. A bill introduced Oct. 20 would force
the big three mortgage agencies to take account of energy costs in every
loan they insure, guarantee or buy. It would also require them to instruct
appraisers to adjust their property valuations upward when accurate data on
energy efficiency savings are available.
Titled the SAVE Act (Sensible Accounting to Value Energy), the bill is
jointly sponsored by Sens. Michael Bennet, a Democrat from Colorado, and
Johnny Isakson, a Republican from Georgia. Here’s how it would work:
Along with the traditional principal, interest, taxes and insurance (PITI)
calculations, estimated energy-consumption expenses for the house would be
included as a mandatory new underwriting factor.
For most houses that have not undergone independent energy audits, loan
officers would be required to pull data from either previous utility bills —
in the case of refinancings — or from a Department of Energy survey database
to arrive at an estimated cost. This would then be factored into the debt-
to-income ratios that lenders already use to determine whether a borrower can
afford the monthly costs of the mortgage. Allowable ratios would likely be
adjusted to account for the new energy/utilities component.
For houses with significant energy-efficiency improvements already built
in and documented with a professional audit such as a home energy rating
system study, lenders would instruct appraisers to calculate the net present
value of monthly energy savings — i.e., what that stream of future savings
is worth today in terms of market price — and adjust the final appraised
value accordingly. This higher valuation, in turn, could be used to justify a
higher mortgage amount.
For example, Kateri Callahan, president of the Alliance to Save Energy, a
non-profit advocacy group and a major supporter of the new legislation,
estimates that a typical new home that is 30 percent more energy efficient
than a similar-sized, average house will save about $20,000 in utility
expenses over the life of a mortgage. Under the Bennet-Isakson bill,
appraisers would be required to add those savings to the current market
valuation of the house. In this instance, Callahan said, the increase in
value would be about $10,000.
Dozens of housing, energy and environmental groups have endorsed the new
legislation including appraisers, large home builders, the U.S. Chamber of
Commerce, the U.S. Green Building Council, the Natural Resources Defense
Council, green-designated real estate brokers, the Institute for Market
Transformation and the National Association of State Energy Officials, among
Business groups such as the U.S. Chamber are backing the legislation
because they see it as an employment generator that requires no federal
budget outlays, no new taxes or programs. A joint study by the American
Council for an Energy-Efficient Economy and the Institute for Market
Transformation estimated that 83,000 new jobs in the construction, renovation
and manufacturing industries could be stimulated by the legislation if the
new underwriting rules were phased in over a period of years.
But you might ask: In a fractious, polarized Congress, could this bill
actually make it through this session? The co-sponsors are optimistic and
supporting groups say there is substantial bipartisan support — a rarity —
for the idea in both the House and Senate.
In the meantime, for homeowners who think that their energy-efficiency and
cost-saving improvements should be worth something, there is no rule barring
you from asking a qualified appraiser or a lender to assess the added market
value of those features. You can get your house rated and documented and
pretty much insist they do precisely that.
Or you can invest in documented improvements that save on utility expenses —
a worthy goal in its own right — and hope that the federal agencies see the
light and change their underwriting and valuation procedures before you go to
sell. Sooner or later this is going to happen.
Kenneth Harney is a syndicated real estate columnist.