Mortgage Lenders Should Consider Energy Costs in Determining What Homes Borrowers Can Afford

November 11, 2011

Coalition Pushes Mortgage Lenders to Consider Electricity Bills
Gabriel Nelson

According to Greenwire, a bill currently pending in Congress, S. 1737, would make government-backed mortgage lenders look at energy costs and tell appraisers to factor in efficiency savings. The bill, entitled the “Sensible Accounting to Value Energy Act of 2011,” or SAVE, would improve the accuracy of mortgage underwriting used by Federal mortgage agencies by ensuring that energy costs are included in the underwriting process. The legislation would have the indirect effect of encouraging reductions in the amount of energy consumed by homes and stimulating the creation of energy efficiency retrofit and construction jobs. S. 1737 is sponsored by Senators Michael Bennet (D-Colo.) and Johnny Isakson (R-Ga.). Currently, government-backed companies such as Fannie Mae and Freddie Mac assume that all houses in a neighborhood will have the same energy expenses when deciding what homes a borrower can afford. Even though the newest efficiency standards could reduce a homeowner’s energy costs by up to 30 percent over a typical home, these energy savings are not taken into account when appraisers determine the value of a home or when Fannie and Freddie determine whether a borrower can afford a particular home.

According to Greenwire, the bill is now pending in the Senate Banking Committee, and has broad support from Republicans and Democrats, industry groups and environmental groups. The American Council for an Energy-Efficient Economy (ACEEE) estimates that the SAVE Act could create as many as 80,000 jobs retrofitting old houses, as people try to lower their energy bills and get a better deal when refinancing their mortgages.

This is yet another situation where Fannie Mae and Freddie Mac are impeding efforts to stimulate investment in energy efficiency. As noted in Energy Forward in September, Richard Branson Leads Effort to Use New Financing Approach to Turn Commercial Buildings ‘Green’, the bureaucrats at Fannie Mae and Freddie Mac blocked the use of PACE financing, refusing to allow homeowners to exercise a mechanism that potentially put new debt (incurred to support energy efficiency investments) in a superior position to the existing mortgage debt. According to Greenwire, some of the largest U.S. homebuilders say that they would build houses to thriftier energy standards, saving money for buyers in the long term and growing profits for builders, if Fannie and Freddie added lower electric bills to the value of a home. Apparently it takes federal legislation to force Fannie and Freddie to apply common sense. If that’s the case, then S. 1737 is necessary, and stands a reasonable chance of being enacted given its bipartisan support.