In part 4 of this post, I asserted a potential for 500,000 - 800,000 jobs due to aggressive implementation of solar power.
According to the USA’s 42nd President (beginning 2:50 in to the video below), I’m a little off…. by a factor of at least 3.
I’m not an economist, but I am a common-sense accountant, so I believe I can take a conservative measure of the economic impact of this policy proposal.
Consider the case study in Part 3. The policy allowed Mr. Jones to borrow about $39,275 more than he otherwise would have been able to. Furthermore the terms of the loan forced him to spend all of it, and then some (i.e. another $3,225 out of his pocket {for the moment}... plus another $5,500 out of his utility’s treasury). All told, it’s an injection of $48,000 directly into the economy that would not have occurred but for the long-term low-interest financing brought about by the policy. Over time, Mr. Jones would recover $7,500 in tax credits for installing the solar panels and geothermal heat pump[6] plus the net $106 per month in reduced cost of home ownership, plus an additional tax deduction for mortgage interest on the borrowed $39,275. At least some of these credits, deductions and savings will be further spent... another direct economic infusion.
Most economists believe in a multiplier effect... where direct spending is compounded as a result of the people and companies further spending at least a portion of the initial direct spending. Per Moody’s Economy, a multiplier of 1.59 is applicable to infrastructure projects (which this very-much is). Thus, just the direct $48,000 spend would lead to about $76,300. GDP resulting from the $7500 tax credit, the additional mortgage interest tax deduction (about $460/yr), and $106/month ($1,272/yr) home-ownership savings wouldn’t have as high a multiplier because the homeowner (a) wouldn’t be forced to spend it and (b) might have gone into personal debt for their out-of-pocket costs… yet an additional $4,000-$5,000 in GDP would be reasonable… for a total GDP boost in excess of $80,300.
The added benefit of all this new economic activity would be additional jobs that can’t be exported, particularly in the hard-hit construction industry. This proposal will be especially beneficial in areas of the country that have suffered the most due to the collapse of the housing market (where prospective users of renewable power are unlikely to be eligible for a conventional home equity loan), where electricity usage and/or electricity rates are high, and which benefit from an abundance of sun (California, Arizona, Southern Nevada, Florida). There is a substantial relationship between GDP growth and job growth... particularly when the GDP growth occurs in an industry where there is substantial excess capacity (like construction). In 2012, US GDP per employed person was about $105,500. So, for every Mr. Jones that can renovate his house, about 0.72 jobs is likely to be created. If there are one-million Mr. Jones that take advantage of this proposal... that’s 720,000 jobs, and $1.27 billion per year in additional discretionary income in the energy-saving households.
The reduced cost of home ownership should reduce the credit risk to the holders of these mortgages.
The only Federal outlays that would be required under current law are (a) a 30% tax credit (through 2016) for Section 1122 improvements and (b) a mortgage interest deduction for interest upon the amounts financed. Those outlays almost certainly would be offset by Federal receipts resulting from the economic activity and reductions in Federal outlays for unemployment benefits and other welfare programs.
Suppose 1,000,000 “Mr. Jones projects” occurred as a result of the proposal (less than 2% of America’s single-family homes). The fiscal breakeven point would occur if the $48-billion worth of projects (a) yielded $80.3-billion in GDP growth {a very reasonable estimate}, (b) resulting in almost $11.65-billion in additional federal receipts {or about 14.5% the added GDP... currently federal receipts are about 15.5% of GDP} and (c) 720,000 new full-time non-exportable jobs {reasonable} resulting in 50,000 families no longer receiving Food Stamps assistance {also conservative}. Should these projects result in higher GDP growth, higher federal receipts or additonal employment/further reductions in government benefits, enacting the proposal would reduce the national debt... perhaps by $1-to-$2-billion. If 1,000,000 projects occurred each year, the job gains would be permanent.
Historically, the price of solar panels has come down 20% each time worldwide usage of them doubles. I have not considered the economic or fiscal impact of any future price decreases, but, all things being equal, any further cost decreases would be fiscally positive.
The energy-related improvements in the Mr. Jones example would reduce his household’s grid-energy consumption from an average of 2,500 kilowatt hours per month to about 500 kilowatt hours per month... a reduction of about 2,000 kilowatt hours per month, or 24,000 kilowatt hours per year.
If electric utilities offset this reduced demand with a reduction in supply, this single project would prevent about 28,400 lbs of carbon dioxide pollution each year.[7] If one million homes around the country received these results, this would reduce America’s annual carbon dioxide output by about 14.15 million metric tons.[8] If all of the reduction in grid supply comes from shutting down coal-fired plants, the CO2 reduction would be as much as 25.3 million metric tons. [9]
Now, lets dream a bit bigger. Suppose this program can achieve an average electrical-energy energy savings/renewable-energy production of just 13,000 kwh per household in 73.1-million US households (not quite 70% of all households and about 90% of single-family-home households). That would be around 950-billion kwh. Now, suppose the average street-legal vehicle in the USA were 8% more energy efficient[10] than today’s fleet {attainable}. With the amount of electricity saved in the households, you could power half of all American vehicles in all vehicle classes with electricity without generating any additional electricity from a coal, gas or nuclear power plants. These transportation changes would cut annual CO2 emissions by 777 million metric tons[11]... more than ⅛ of what the US puts out in a year.
There is no magic bullet to solve America’s and the planet’s economic, energy, and environmental challenges. It will take great minds formulating great ideas and courage among our nations leaders to adopt them. The proposal I’ve put forth in these pages will help the US and the world on all of these fronts with no obvious downside.
Click Here to go back to Part 1, Part 2 or Part 3.
[6] The extent of the tax credit depends upon the nature of the local incentive.
[7] Based upon the carbon footprint of Arizona’s fuel mix for electricity per carbonfund.org
[8] Based upon the carbon footprint of the USA’s fuel mix for electricity per carbonfund.org;
[9] 24 B kWh x {2.86 mt CO2 / mt coal} ÷ {2,712 kWh / mt coal}.
[10] Not to be confused with fuel efficient. Fuel efficient = less fuel in the tank, battery etc. for the same work. Energy efficient = less power required at the axle to move people and cargo the same distance.
[11] 719 million from the conversion to electricity; 58 million from the remaining gas/diesel vehicles being more efficient.
Mr. Jones bought a house in Arizona in 2008 for $160,000 and financed it with $8,000 down and a 30-year-mortgage Fannie Mae-conforming of $152,000 with a principal, interest, and mortgage insurance payment of $1000 per month. His electric bill averages $310 per month and does not use natural gas. After 3 years, the mortgage balance is $148,000 but the house’s value is now just $120,000.
Mr. Jones decides he wants to refinance his house and do energy improvements. He considers the following improvements and gets estimates on each: additional insulation and a radiant barrier in the attic, Energy Star windows & patio door, an Energy Star hybrid-heat-pump water heater, solar panels, and a geothermal heat pump.
He hires an Energy Inspector to do a Home Energy Rating System (HERS) Audit of his home. It costs about $700. The audit finds the possible improvements to have the following energy-savings impact:
| Item | Upgrade from | Cost Estimate | $ Saved / Mo |
| Attic Insulation to R38 | R13 | $2,000 | $9 |
| Radiant Barrier | None | $1,500 | $7 |
| Dual-Pane Low-e Glass Windows | Single Pane | $5,200 | $41 |
| Dual Pane Low-e Glass Patio Door | Single Pane | $1,000 | $10 |
| Hybrid Heat Pump Water Heater | Standard Electric W/H | $1,600 | $28 |
| 5500w Solar Electric System... | None | $24,000 | $125 |
| ...less Utility Payment | -$5,500 | ||
| Geothermal Heat Pump | 12 SEER Heat Pump | $12,000 | $50 |
Then, Mr. Jones seeks a Streamline refinance loan with an EEM.
Since his payoff balance would be $148,000, the base loan amount would be $148,000.
The EEM limits would be as follows:
Weatherization $8,880 (6% of $148k) HVAC/WH Same Sec. 1122 $28,975 (95% of $30,500 [$24k + $12k - $5.5k])
Mr. Jones EEM plans call for::
Weatherization $9,700 HVAC/WH $1,600 Sec. 1122 $30,500
so the most Mr. Jones can borrow will be:
Payoff Balance $148,000 Weatherization $8,700 (really $8,880, but he elects to pay cash for the patio door) HVAC/WH $1,600 Sec. 1122 $28,975 (Mr. Jones must pay cash or charge the other $1,525) Total $187,275[5]
At a 4.75% interest rate, the principal, interest, and mortgage insurance payment would be about $1164, an increase of $164 per month. However, Mr. Jones energy bills would go from $310 per month to $40. Since the cost of ownership would be reduced from $1310 to $1204 (a reduction of 8.1%), Mr. Jones would qualify for the loan.
From here, Mr. Jones would apply to his utility to receive the $5,500 utility credit for the solar panels he wants to put up. The utility will send him a confirmation letter indicating the date they will have funds available for his project OR (more likely) a letter indicating they’ve deferred the application to another funding cycle and when they’ll expect to send you a confirmation letter.
After and only after receiving the utility confirmation letter, Mr. Jones would need to apply for the refinance/EEM loan and get (a) good-90-day bids on the weatherization work and the water heater (b) commitments from these contractors that they could do the work within 60 days of the loan closing, (c) good-180-day bids on the solar panels and the geothermal heat pump and (d) commitments from these contractors that they can do the work within 150-days of loan closing.
At the time of closing, Mr. Jones original mortgage would be paid off and the funds for energy improvements would be put into an escrow account. At the time of closing, there are two work and payment timelines that must be observed: one for the Section 1122 improvements, and one for the rest.
The contractors for the solar energy improvements and the geothermal heat pump would be paid (a) Mr. Jones’ 5% share of the costs plus (b) an additional 45% of the project costs from the escrow accounts. The contractors would then have 180 days to complete this work. Final payment to these contractors would not occur until a third-party inspector verified to the lender and escrow company that the improvements were complete.
The weatherization and water-heating improvements would need to be completed within 90 days. These contractors would be paid in full at the time of completion. For this work, Mr. Jones could sign a statement certifying that the work has been done to his satisfaction.
In the end, Mr. Jones will have a lower-carbon-footprint home that’s more affordable and at least as comfortable as before he improved it.
See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.
Click Here to go back to Part 1 or Part 2
[5] As a practical matter, the loan would have to be a bit larger (maybe $500-$1000) to cover the cost of proof-of-completion inspections and costs to cover additional administrative burdens.
Today, FHA, VA, Fannie Mae, and Freddie Mac each endorse the concept of promoting energy efficiency in the home and each mortgage backer has guidelines to “make financing energy efficiency less burdensome.”[1] However, none of the programs are terribly robust or well-promoted, and each agency/GSE/GOE has different EEM guidelines. The absence of a unified program makes energy-efficiency loans hard to promote and leaves a lot of room for confusion. A program with one set of rules and benefits to homeowners would be a blessing to owners, buyers, lenders, real estate agents, contractors, policymakers, the renewable energy industry and the environmental movement.
The Energy Efficient Mortgage programs of today appear to have been borne out of the 1970’s energy crisis. Their main thrust was help finance weatherization improvements. Now, I’m all for weatherization… putting solar panels on a poorly insulated, drafty house is just as stupid as putting a brand new racing engine in a leaky speedboat. But this isn’t the 1970’s… when solar panels were a long way from a cost-competitive energy solution. Now that unsubsidized solar power is cheaper than grid power in Hawaii, and lightly-subsidized solar trumps grid-power costs in parts of the Sun Belt, it’s time EEM programs made bigger improvements possible.
No worries. There is ample precedent for government-backed mortgages to be refinanced when the borrower has negative equity.
For years, homeowners with FHA-backed & VA-backed loans have been able to
(a) “Streamline refinance” their mortgage balances... that is, refinance their mortgage balances, with or without equity and no matter how far underwater they are, so long as they are not behind on their mortgage and the refinance causes their mortgage payment to drop 5% or more PLUS
(b) take a few thousand dollars cash out (around 5% of the home’s value) ONLY to pay for cost-saving energy efficiency improvements... usually weatherization (this is the FHA’s and VA’s current idea of an EEM).
As an added bonus… starting as early as mid-November 2011 and through the end of 2013, homeowners upside-down (even extremely upside-down) in most pre-2010 Fannie Mae-owned & Freddie Mac-owned loans will be allowed a strict no-cash-out refinance... but the current policy does not allow the homeowner to get additional funds for energy efficiency improvements.[2]
See Part 3 of this post to see how a sample homeowner might benefit.
See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.
Click Here to go back to Part 1
[1] http://www.resnet.us/ratings/mortgages
[2] http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf
[3] Not to exceed 6% of the home price (for purchases) or base loan amount (for refi’s)
[4] Not including geothermal heat pump
by Ian Kerr
I’m a middle-class Arizona homeowner in a middle-class Phoenix-area neighborhood with a wife, twin 6-year-old children, and 28 solar panels on my roof. The 6580-watt-rated system is on course to generate enough electricity to pay for itself in about 7 years and last at least 18 years beyond the payback period.
I’ve taken advantage of Federal, state, and utility incentives in order to buy the photovoltaic (PV) system. All of these incentives are still available to all my neighbors. The benefits of these incentives are smaller now than a year ago… but still robust. Yet, I’m the only one in the neighborhood producing and using my own green energy.
Why am I alone? Well, despite the incentives, buying the system I now own came at an up-front cost of about $16,000… and I was in a position to pay cash. Middle-class families tend not to have that much money in the bank. Theoretically, my neighbors could take home equity loans, but this is Arizona, one of the epicenters of the housing-market collapse. Lots of my neighbors are upside-down in our mortgages (including me). It’s quite the sad coincidence that many places where solar energy would do the most good are also places that almost certainly will take the longest to recover from the bursting of the housing bubble (Arizona, Nevada, California, Florida). Borrowing by other means (construction loans, credit cards) makes no sense because the high interest rates cause the payments to be so high that it would be cheaper to buy the electricity (or the payback wouldn’t occur soon enough to make it worthwhile).
Some companies offer leased PV systems… but you have to have excellent credit to qualify (usually a credit score of at least 700 or 720), and you have to agree to escalating lease payments (about 3.5% per year for the life of the lease… which fiercely blunts the payback and may even exceed the rate of inflation for electricity). Furthermore, you’d have to overcome the uneasy feeling of, in effect, becoming a tenant (of the solar company) in your own house.
Clearly the difference between my PV system being a neighborhood solo act and being a part of a ZIP-code-wide solar symphony is low-cost financing of the up-front installation costs. Since solar panels are warrantied for 20-25 years and likely last much longer, low-cost long term financing would be both prudent and useful.
Clearly, a government program to facilitate some low-interest long-term loans would go a long way toward mass-adoption of green energy, but no one in Washington seems to want to talk about anything but creating jobs or reducing the Federal deficit.
Well, Washington, if that’s what you want… you’ve got it.
I propose a unified and robust Energy Efficient Mortgage (EEM) program.
It should be adopted by all major Federally-backed mortgage programs (FHA, VA, FmHA, etc.) and the guidelines of the mortgage-buying government-sponsored enterprises or government-owned enterprises (GSEs and GOEs like Fannie Mae, Freddie Mac, Ginnie Mae, etc.) should permit the purchase of such mortgages.
This program should allow Americans to buy a home or refinance an existing home AND borrow sufficient additional funds to install cost-effective energy-saving or renewable-energy-generating improvements to their homes… all within the same first mortgage.
Such loans should be considered “conforming loans” to the federal mortgage programs and the mortgage GSEs/GOEs even if the final loan amounts exceed the appraised values of the homes.
There is a precedent for such a program. It exists today. See Part 2 of this post to contrast the current programs to my proposal.
See Part 3 of this post to see how a sample homeowner might benefit.
See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.
