Valuing Efficiency in Underwriting

Home Energy Efficiency & Mortgage RiskIn 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 focused on owner likelihood to default or prepay and not on existence of a premium for energy efficiency features.

The strength of the performance was strong and clear as quoted in an NBC article:

“We were quite surprised by the numbers,” said Nikhil Kaza, asst. professor of city and regional planning at the University of North Carolina at Chapel Hill who worked on the study. “We thought there would be some association between energy efficiency and mortgage risk, but we did not expect such a large association.”

The study authors call for policy work as today’s underwriting practices do not account for efficiency:

“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 homebuyers from fully enjoying the cost savings…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.”

On June 6, 2013 Senators Bennet (D-CO) and Isakson (R-GA) introduced Sensible Accounting to Value Energy (SAVE) Act 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.

NAR has worked with IMT over several years to minimize the impact of SAVE on older homes and worked vigorously to ensure that the proposed legislation did not stigmatize or disadvantage them in any way.  On June 5th, NAR send a letter to Senators Bennet and Isakson, applauding their efforts on the bill.

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