Considering the pitiful nature of the American home financing system, with its systematic ignoring of key fiscal issues like location and energy efficiency, perhaps it is time for Congress to have some P.I.T.I.E. on us.
The Sensible Accounting to Value Energy (or, voila, SAVE) Act would require the federal loan process to assess the expected energy costs for mortgage loan applicants.
The current basic loan calculation: Principle + Interest + Taxes + Insurance (PITI) = the homeownership burden that mortgage lenders consider in the load process. The SAVE Act, introduced by Senator Michael Bennett (D-CO), would modify this to PITIE by adding Energy into the equation.
PITI absolutely misrepresents the situation. For many homeowners, Energy is the top cost after PI (principal & interest) payments, frequently larger than property taxes and is almost uniformly larger than that last I (insurance).
After the collapse of the housing market, interest groups and individuals started demanding a better way to assess a homeowner’s living costs. Under the current mortgage-lending process, these costs are essentially ignored. In 2007-2008, the average homeowner spent $822 on homeowner’s insurance and $1,897 on property tax, both important variables in determining mortgage lending. But in the same year, the average homeowner spent $2,340 on energy costs.
The sad thing: glossy luxuries or adding another room will increase a home’s value but not super-insulating to the point of seriously reducing that $2340 in energy costs.
Granite countertops vs. utility bills. The amount a buyer can borrow for a new home is determined in large part by its expected resale value. In general, the more value-added features a home has, the higher its perceived resale value and the larger the mortgage.
Under the current mortgage-appraisal rules, however, that formula doesn’t apply to extra-cost options designed to save energy. A buyer who spends $5,000 on granite countertops or hardwood flooring can expect to be rewarded for doing so. But the buyer who spends that same amount on upgraded ductwork, a high-efficiency hvac system, or thicker subslab insulation has done little to increase his or her home’s value. An energy-conscious buyer’s only reward is a reduction in utility bills.
The systematic exclusion of energy issues in the home appraisal and mortgage process fosters a situation of riskier mortgages and families under greater stress. Consider my house: between energy efficiency and renewable energy systems, my utility bills are roughly twenty percent my neighbors’. My solar panels, solar hot water, high-efficiency fireplace insert, radiant heating, and improved insulation were, in combination, worth a total of $0 in two (relatively) recent appraisals supporting a refinancing. Yet, those are very tangible home assets that provide quite real ‘after-tax’ income value to my household. Those after tax dollar savings equal more than a mortgage payment. If laid off or otherwise stretched financially, would that mortgage payment+ of available money help keep a roof over my family? Energy efficiency (whether through higher mpg vehicles or through better built homes) is a key path toward providing resiliency in the face of uncertain (and generally rising) energy prices and in the face of fiscal (and other) uncertainty. And, someone- the bank- should have told them inefficient and energy inefficient homes foster higher foreclosure rates.
The power of this reality and the implications of following through on it has helped foster an unusual coalition in support of the SAVE Act: big builders and environmental organizations. (Though, sign, not surprisingly the real estate community is opposed, fearful (with reason?) that it could discourage people from (blindly) buying energy inefficient (wasteful) homes.) The truth is that the major builders are, increasingly, certifying their homes for energy efficiency. Home Energy Rating System from the nonprofit Residential Energy Services Network. HERS and home energy rating is an item for another discussion, another day …) I have heard major builders’ executives state that the HERS-rated homes sell faster and with fewer (to no) discounts in comparison to similar (non-rated) homes. In other words, when presented a fait accompli (already built) option, the American home buyer gravitates to the Energy Smart choice. How, however, to make this a more evident and more standard part of the home ownership process.
The SAVE Act seeks to address the situation by adding energy into the mortgage process in two paths:
Include energy in the affordability test which would mean that the more energy efficient the home, the more a borrower could borrow with the same income level. Provide a path for creating a “net present value” (NPV) for expected energy savings that would allow a lender to increase the loan rate.
These, combined, would incentivize banks (and appraisers) to pay (serious) attention to energy issues when examining homes and prospective buyers. This attention would migrate to the purchasers (and sellers), creating an incentive for energy efficiency that could help break through the market barriers that are inhibiting the Energy Smart choice from becoming the easy and preferred choice to make.
What would the SAVE Act help achieve?
- Reducing the risk of a future foreclosure crisis by reducing the energy burden for the average homeowner.
- Create jobs, throughout America, in home energy efficiency (both in new build and retrofit markets).
- Ease the introduction of renewable energy systems into the home market. (A simple rule of thumb: invest in the low hanging fruit of negawatts before investing in paths to generate watts.)
- Reduce pollution.
- Put money into the average homeowners’ pockets.
The SAVE Act truly looks to be a win-win-win (with the losers being those not wanting to inhibit sales of burdensome energy inefficient homes and those who profit from selling polluting kilowatt hours) in the nation’s best interest.
Truth be told, it is an introduced bill in the Senate. That means it requires support. Is it time for you to call your Senators to ask if they support the SAVE Act. If so, thank them for their support. If not, urge them to sign on.
Article by A. Siegel, appearing courtesy Celsias.
