Valuing Energy Efficiency in Appraisal and Underwriting

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.

Laura Stukel

Laura Stukel is an efficiency "insider," serving in multiple industry roles to blur the lines where efficiency overlaps real estate. Her projects include convening the Green MLS/Better Buildings Roundtable in September, 2011. As outputs of that work, she is currently developing the Real Estate Transaction Standard Green MLS Implementation Guide for the National Association of Realtors, and managing a test project to automate how residential green building program data can interact with MLS data.

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