Putting some energy into underwriting

WASHINGTON — When you apply for a mortgage to buy a house, how often does the lender ask detailed questions about monthly energy costs or tell the appraiser to factor in the house's energy-efficiency features when coming up with a value?

Hardly ever. That's because the big three mortgage players — Fannie Mae, Freddie Mac and the Federal Housing Administration, who together account for more than 90 percent of all loan volume — typically don't consider energy costs in underwriting.


Yet utility bills can be larger annual cash drains than property taxes or insurance — key items in standard underwriting — and can seriously affect a family's ability to afford a house.

A new, bipartisan effort on Capitol Hill could change all this dramatically and for the first time put energy costs and savings squarely into standard mortgage-underwriting equations.

A bill introduced Oct. 20 would force the big three mortgage agencies to take account of energy costs in every loan they insure, guarantee or buy. It would also require them to instruct appraisers to adjust their property valuations upward when accurate data on energy-efficiency savings are available.

The SAVE Act (Sensible Accounting to Value Energy) is jointly sponsored by Sens. Michael Bennet, a Democrat from Colorado, and Johnny Isakson, a Republican from Georgia. Along with the traditional principal, interest, taxes and insurance (PITI) calculations, estimated energy-consumption expenses for the house would be included as a mandatory new underwriting factor.

For most houses that have not undergone independent energy audits, loan officers would be required to pull data from either previous utility bills — in the case of refinancings — or from a Department of Energy survey database to arrive at an estimated cost.

This amount would then be factored into the debt-to-income ratios that lenders already use to determine whether a borrower can afford the monthly costs of the mortgage. Allowable ratios would likely be adjusted to account for the new energy/utilities component.

For houses with significant energy-efficiency improvements already built in and documented with a professional audit such as a home-energy rating study, lenders would instruct appraisers to calculate the net present value of monthly energy savings — i.e., what that stream of future savings is worth today in terms of market price — and adjust the final appraised value accordingly.

This higher valuation, in turn, could be used to justify a higher mortgage amount.

For example, Kateri Callahan, president of the Alliance to Save Energy, a nonprofit advocacy group and a major supporter of the new legislation, estimates a typical new home that is 30 percent more energy efficient than a similar-sized, average house will save about $20,000 in utility expenses over the life of a mortgage.

Under the Bennet-Isakson bill, appraisers would be required to add those savings to the current market valuation of the house. In this instance, Callahan says, the increase in value would be about $10,000.

Dozens of housing, energy and environmental groups have endorsed the new legislation, including appraisers, large homebuilders, the U.S. Chamber of Commerce, the U.S. Green Building Council, the Natural Resources Defense Council, green-designated real-estate brokers, the Institute for Market Transformation and the National Association of State Energy Officials, among others.

Business groups such as the Chamber of Commerce back the legislation because they see it as an employment generator that requires no federal budget outlays, and no new taxes or programs.

A joint study by the American Council for an Energy-Efficient Economy and the Institute for Market Transformation estimated that 83,000 new jobs in the construction, renovation and manufacturing industries could be stimulated by the legislation if the new underwriting rules were phased in over a period of years.

But you might ask: In a fractious, polarized Congress, could this bill actually make it through? The co-sponsors are optimistic, and supporting groups say there is substantial bipartisan support — a rarity — for the idea in both the House and Senate.

In the meantime, for homeowners who think their energy-efficiency and cost-saving improvements should be worth something, there is no rule barring you from asking a qualified appraiser or a lender to assess the added market value of those features. You can get your house rated and documented and pretty much insist they do precisely that.

Or you can invest in documented improvements that save on utility expenses — a worthy goal in its own right — and hope the federal agencies see the light and change their underwriting and valuation procedures before you go to sell. Sooner or later this is going to happen.

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