Why Should Mortgage Lenders Care About Having Energy Efficient Property in Their Portfolio?
By Jesse Rivera, CEO at New Vista Solutions
The green energy movement began decades ago with the intention of saving our planet from harmful CO2 gas emissions, but this eco-friendly effort has become more about economics as commercial and residential property owners focus on energy efficiency that can reduce utility and operating costs.
The mortgage industry has responded to increased demand for loan products that finance the purchase or renovation of energy-efficient real property.
Fannie Mae offers Green Rewards (lower interest rates, higher loan-to-value ratios and a free energy audit) on qualified multi-family loans, and it began offering a multi-family green bond program in 2012. According to its website, it has sold more than $50 billion of the securities.
In November, 2018, Freddie Mac announced new enhancements to its GreenCHOICE mortgage program that will help lower-income families reduce utility costs through more affordable, energy-efficient home improvement financing options. The GSE also just announced a new green mortgage bond program that targets investors who look at environmental, social and governance criteria (ESG investors) when considering potential investment products.
So, there is no shortage of attention being given to energy efficiency in the real estate markets, but what about mortgage lenders? What’s in it for them?
Here are three reasons mortgage lenders should be loading their portfolios with energy-efficient assets:
1. Lower risk of mortgage default
A study performed by the University of North Carolina’s Center for Community Capital, and the Institute for Market Transformation (IMT) reported that owners of energy-efficient homes (those with Energy Star® ratings) are 32% less likely to default on their mortgage.
Cliff Majersik, executive director of IMT, stated, “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.”
Roberto G. Querica, director of the UNCE Center for Community Capital and one of the study’s authors added, “Since our study findings now show that energy efficiency is strongly and consistently associated with lower mortgage lending risk, lenders and policymakers have one more reason to promote it.”
2. Resilient property stands up to natural disasters
Resilient design is getting more attention in the green energy space as the frequency of dramatic weather events increases. In 2018, Fannie Mae updated its HomeStyle Energy mortgage guidelines to include resiliency upgrades.
The U.S. Green Building Council (USGBC), best known for its LEED (Leadership in Energy and Environmental Design) rating system, has developed the RELi rating which combines hazard-specific design criteria with energy efficiency.
A property with resilient design is more likely to survive a catastrophic weather event — a loss mitigation win for the mortgage lender.
3. Higher appraised values
Higher appraised values mean lower loan-to-value ratios and less exposure for lenders. In 2006, the HERS Index (Home Energy Rating System) was created by RESNET (Residential Energy Services Network), a not-for-profit founded in 1995 to develop a national market for home energy rating systems and energy-efficient mortgages.
The Appraisal Institute and RESNET have partnered to provide appraisers with access to RESNET’s national registry of HERS rated homes. The HERS score has become the gold standard for rating the energy efficiency of a home. According to the HERS website, over two million homes in the U.S. have been HERS-rated, and nearly one in four new homes built today receives a HERS Index score.
The lower the score, the more energy efficient the property — zero being the best score reserved for net-zero energy homes, which produce as much energy as they consume. A study by the North Carolina Building Performance Association showed that homes with lower HERS Index scores had sales prices as much as 9.5% higher in North Carolina’s major metro areas, compared to homes that were not rated.
Mortgage lenders who are on board with the idea of seeking out green energy borrowers need to know about The Green Report. This one-of-a-kind report provides a list of government-sponsored and utility-backed financial incentives available to property owners looking to build or upgrade real property using energy-efficient products or materials. The incentives are paid out in various ways — tax credits, rebates, tax deductions, grants, subsidy programs and more.
Some property owners know about these incentives, but don’t know where to find reliable and comprehensive information on the topic. Others don’t even know incentives exist. Statistics show an estimated 60% of available green incentives are ignored or under-utilized each year.
That leaves a lot of money on the table for property owners, and it creates a marketing and consumer relations opportunity for mortgage lenders to step in and save the day. A lender who can offer potential borrowers information that saves money on the construction of a new commercial building or a home renovation project will quickly overshadow the competition.
Mortgage lenders have a lot to gain from promoting and funding green energy projects. Who will lead the charge?