From Here to Sustainability… Part 2

Energy Efficient Mortgages Exist Today… sort of.

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.

 

But… What If I’m Upside-Down?!?

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]

 

What a 21st Century EEM Standard Should Look Like

1. All Federally-backed mortgage programs, as well as mortgage GSEs and GOEs, should adopt the same “conforming loan” standards for Energy Efficient Mortgages... Including
   a. Both purchase-money and refinanced loans would be eligible.
   b. Refinancing of underwater mortgages, if taking advantage of the EEM program, would be allowed indefinitely and no matter how far one is upside-down.
2. Base loan limits (the amount financed to purchase or refinance the existing mortgage) would not change from the present limits.
3. EEM loan limits (i.e. the additional amount permitted to be borrowed for improvements) should be on the order of…
   a. $6k - $10k[3] for weatherization (including insulation, windows, etc.)
   b. $6k - $10k[3] for high-efficiency heating/ventilation/air-conditioning (HVAC)[4] and water heating
   c. Up to 95% of installed cost (net of any utility credit or state rebates) of any systems or devices eligible for a Residential Energy Efficient Property Credit under Section 1122 of the American Recovery and Reinvestment Act of 2009... including Solar Electric systems, Solar Hot Water Heaters, Wind Generators and Geothermal Heat Pumps.
4. Instead of qualifying for a Streamline refinance based upon minimum mortgage payment savings of 5%, one would qualify based upon a minimum cost-of-ownership savings (principal, interest, mortgage insurance, energy bills... but excluding property tax & homeowner’s insurance) of 5%.

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

 

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[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