Energy Backed Securities Meet Energy Efficient Mortgages

A federal program that is not getting much response could be enhanced by incoroporating the Center's proposed Energy Backed Securities (EBS) program, which operates like mortgaged back securities.

The federal government is promoting the energy-efficient mortgage (EEM), a government loan granted to borrowers who build or upgrade their homes with energy-efficient features. The problem is most consumers either don’t know about the program, which has been around since the early 1990s, or they are not taking advantage of it. The Department of Housing and Urban Development (HUD) is jumpstarting the EEM program with $50 million through a fiscal year 2010 appropriation. The Federal Housing Administration (FHA), Fannie Mae and the Department of Veterans Affairs all have some version of an energy-efficient mortgage.

How the EEM works: Borrowers add the money needed to make green upgrades, for example, $5,000 to the mortgage, even if that means they would exceed the traditional loan limit. Borrowers don’t have to qualify for the expanded loan and 100% of the cost of the improvements can be financed. The idea: Mortgage payments are a little higher, but utility bills drop more. That is the unique part of an energy-efficient mortgage vs. a regular mortgage: An EEM will count the energy savings as income to the borrower. It gives the borrower an opportunity to qualify for a slightly bigger mortgage in order to get a more energy-efficient home.

The borrower needs to get an energy rating of the house, which is a comprehensive assessment of the home’s energy use. It considers everything from the types of windows and insulation the house has to the major appliances, including the heating and cooling systems and the building structure itself. The main method of evaluating homes is the called the Home Energy Rating System (HERS), and it must be performed by a certified HERS rater. The rating calculates the energy savings on an annual basis and net present value of savings. Getting a home energy audit by a certified HERS auditor costs anywhere from $300 to $500. Some local utilities and state energy offices offer incentive programs that help pay for a HERS rating on behalf of the borrower. The audit is a cost that “might discourage borrowers” from actually obtaining an energy-efficient mortgage.

Savings are counted as income to the borrower – enabling them to stretch their debt-to-income ratio, a key factor lenders take into consideration before approving a mortgage. The improvements can be included in a mortgage only if their total cost is less than the total dollar value of the energy that will be saved during their life, according to HUD. (WSJ, 1/18/10,
SmartMoney.com)