Making 'Green' More Affordable (New York Times)

New York Times
(6/27/2013 5:41 PM, Lisa Prevost)

Consumer demand for high-efficiency homes is rising. But the value of "green" isn't always factored in by appraisers, and is typically ignored by mortgage lenders.

A bipartisan Senate bill supported by a broad coalition of business, real estate, energy and environmental groups seeks to put energy cost savings into the underwriting equation. Called the SAVE Act (for Sensible Accounting to Value Energy), the legislation could make energy-efficient features more affordable to average-income home buyers by allowing them to qualify for a larger loan amount.

The legislation would require Fannie Mae, Freddie Mac and the Federal Housing Administration to incorporate energy efficiency into their underwriting policies. The energy savings would be considered only when a buyer or homeowner chose to submit a qualified home-energy report, the guidelines for which would come from the Department of Housing and Urban Development.

"Right now appraisers really don't have an effective way of considering energy-efficient features," said Robert Sahadi, the director of energy efficiency finance policy for the Institute for Market Transformation, a major supporter of the legislation. "The ruling methodology is the sales comparison approach, and to the extent that there aren't enough comparables in the marketplace, they're sort of hamstrung. What is being advocated is having a third-party energy report on the house."

Even when home appraisers do account for energy savings in a valuation, mortgage underwriters tend to reject the adjustment, either out of an abundance of caution or because they don't understand it, said Sandra Adomatis, an appraiser in southwest Florida who also works as a consultant for Advanced Energy in Raleigh, N.C. "I'm hearing all over that the underwriters are insisting they take out the energy adjustment," she said.

A spokesman for the Mortgage Bankers Association said the group had not endorsed the SAVE Act, which is part of a broader energy bill awaiting action, and had no position on it. The bill would help borrowers in two ways. First, in the same way that lenders include property taxes and insurance costs when weighing a borrower's income against monthly expenses, they would have to factor in energy cost savings. The resulting adjustment in the borrower's debt-to-income ratio could mean a larger loan amount.

Second, lenders would have to add the value of projected energy savings to the home's value, if the appraiser hadn't already done so. Since mortgage amounts are based on a percentage of the home's value, a higher value would translate into a larger mortgage.

Richard L. Borges II, the president of the Appraisal Institute, called the proposed use of energy audit reports a "very meaningful approach," especially when compared with the incomplete and inaccurate energy-efficiency information often presented to appraisers.

"The people that are exposing the properties to the market — the Realtors — are not conversant and well skilled to describe exactly what they have in a factual manner," Mr. Borges said.

Loan performance on energy-efficient homes, Mr. Sahadi noted, is considerably better than on other homes. A study commissioned by the institute found that default risks are 32 percent lower on homes that meet the government's "Energy Star" guidelines than on similar non-Energy Star homes. The study examined 71,000 home loans from 2002 to 2012.

The findings demonstrate that the SAVE Act approach "isn't some boutiquey idea that we just want to get out there," he said. "We've made a case that this is underwriting positive instead of negative."