Valuing Energy Efficiency in Appraisal and Underwriting
We thought there would be some association between energy efficiency and mortgage risk…
In March, a joint study by the University of North Carolina at Chapel Hill Center for Community Capital and the Institute for Market Transformation (IMT) found that owners of ENERGY STAR-rated homes are one-third less likely to default on a mortgage than the average borrower. Home Energy Efficiency and Mortgage Risks used a sample of 71,000 home loans from 38 states and the District of Columbia, all derived from CoreLogic’s mortgage database. The sample was restricted to single-family, owner-occupied houses whose loans originated during 2002–2012 and were used for purchase only. The focus of the study was on owner likelihood to default or prepay and not on the contributory value of energy efficiency features.
“We were quite surprised by the numbers,” said Nikhil Kaza, assistant professor of city and regional planning at the University of North Carolina at Chapel Hill and one of the study’s authors. “We thought there would be some association between energy efficiency and mortgage risk, but we did not expect such a large association.”
More research is needed to determine causation, though a recent article from NBC’s Today Show, offers a telling anecdote. The Today Show profiles an Olympia, Wash., couple who paid a premium to make their 2,000-square-foot home energy efficient but were enjoying greatly reduced carrying costs as a result. “They pay a measly $70 a year to heat and cool the place,” the show’s Web site says.
The survey’s finding of a strong link between energy efficient homes and loan performance puts attention on underwriting practices that today don’t account for efficiency, said Center director Roberto G. Quercia, a co-author. “Consumer and industry acceptance of energy efficiency is high. But the lack of broad consideration of potential energy savings in the mortgage underwriting process still prevents many moderate- and middle-income home buyers from fully enjoying the cost savings,” said Quercia. “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.”
IMT has been working for several years on the Sensible Accounting to Value Energy (SAVE) Act. The bill is an attempt to develop standards for valuing energy efficiency in the appraisal and mortgage underwriting processes. On June 6, 2013, Senators Bennet (D-CO) and Isakson (R-GA) introduced SAVE in the Senate as S. 1106. The GovTrack website summarizes SAVE as “a bill to improve the accuracy of mortgage underwriting used by federal mortgage agencies by ensuring that energy costs are included in the underwriting process, to reduce the amount of energy consumed by homes, to facilitate the creation of energy efficiency retrofit and construction jobs, and for other purposes.”
The NATIONAL ASSOCIATION OF REALTORS® has worked with IMT over several years to minimize the impact on older homes and worked to ensure that the proposed legislation did not stigmatize or disadvantage older homes in any way. On June 5, NAR send a letter to Senators Bennet and Isakson, applauding their efforts on the bill.
I’m placing this correlation on the difference between attentive homeowners and pride of ownership issues, set against typical wishy washy borrower positioning and activity. The presence of solar systems and such has no correlation with stability of the mortgage product, except that there is a temporary effect of reduced costs in this early stage of solar. Just look to new zealand and similar areas for insight into the future issues. In NZ solar is gangbusters because they routinely deal with intermittent power on grid. But now that so many are on solar, new taxation rolled forth which requires all households to pay standard rates, regardless if they’re on grid or not. So going off grid may cost you more, as solar is now over and above your standard base on grid cost, regardless if you’re on grid or not. The argumentative point being that the power systems are public service required systems and for that reason, it’s everyones responsibility to keep them running and in place. Enter taxation without representation.
You don’t own it until you own it. Unless the system is owned, it’s not appropriately integrated into the value opinion, in my personal opinion. Don’t pay your solar lease bill, and you’ve got a hole in your roof, rather than additional energy efficient systems in place. If tarrifs change, the product costs could change via lease clauses. And with sales agents being typically unware or at least not reporting if systems are owned, leased, leased to own, and also disclosing specific terms, it’s impossible to know and any subsequent energy efficient adjustments against comps are just a guessing game.
The solution which will hopefully gain more attention is to seek non integrated owned solar. You can go to invertersrus and pick up a simple inverter, panel set, and deep cycle battery set for only a few thousand. Mount it on a doghouse in your back yard and then plug an extension cord into that bad boy and run your garage fridge or what ever. And in the future, that’s likely the only way to avoid energy use shaming and improper taxation, all at once. I tell people that solar is not something you need to invest tens of thousands of dollars into and go for long term lease commitments. All you need do is invest what you can when you can and build your system over time.
I have a dream of solar in the future where builders furnish non integrated solar as standard options. Each room has a green and white switch, with convenient little led solar power stock energy level indicator on the green switch. If the energy is available in the solar batteries, you just flip the green switch instead of the white one. So easy, a caveman whom made sure to never sign absurd long term solar lease agreements could do it. Owning good, borrowing bad. That’s my position, and I’m sticking to it. Hopefully this is the year I move on my first solar non integrated set up. It’s literally only a few thousand dollars away for anyone whom lives in the USA. Sub one item at a time and make quality selections based on your budget, rather than seeking advisement from the solar salesman. What is the appropriate formula for tackling leased systems commissions vs actual product cost? I don’t think M&S covers that. Why all the attention to tracking solar savings in underwriting but no attention to the ever so predictable inflationary energy costs in the mortgage qualification process? Food for thought.