Energy efficient homes keep money in owners’ pockets

A study released March 19 and called “Home Energy Efficiency and Mortgage Risks” by the University of North Carolina at Chapel Hill suggests that if you own an energy efficiency home, you are a third less likely to default on your mortgage. The report provides strong evidence that homeowners are taking savings from efficiency and paying their mortgages on time. This raises again the issue of the potential for energy-efficient mortgages, where lenders give credit for efficiency upgrades that may be more important than credit scores in issuing loans.

The study used a sample of 71,000 home loans from across the country originated between 2002 and 2012. Researchers found that mortgages on homes with Energy Star certifications were 32% less likely to default than were loans on homes with no energy-efficiency improvements. (Energy Star certified homes are up to 30% more efficient than code.)

Researchers statistically isolated factors that might account for the different performances by borrowers on their mortgages. They controlled for house size; age of the house; neighborhood income levels; house values relative to the area median; local unemployment rates; borrowers’ credit scores; loan-to-value ratios; electricity costs; and even local weather conditions. The average sale price of both the energy-efficient homes and the others was $220,000, removing the possibility that the energy-efficient properties were high-end houses purchased by families less likely to default.

Washington Post contributor Ken Harney points out that there’s the problem with the way the mortgage system treats energy efficiency: “Under current practices, you’d be hard-pressed to find any lenders who’ll give you a better rate quote on your mortgage application, even if you showed them your Energy Star certification along with documentation that your house saves buckets of money on utility bills.” These are factors that lenders and Congress should consider when making mortgage policy.

Concurrent to the release of the University of North Carolina study, the 9th Circuit Court of Appeals has vacated the district courts order and dismissed the lawsuit against the FHFA regarding PACE financing. The court ruled that the FHFA acted in its role as conservator of Freddie Mac and Fannie Mae, and thus that the courts have no jurisdiction. Similar rulings in favor of FHFA were rendered in New York and Florida, in the second and eleventh circuits. At this time, and despite over 40,000 comments, the FHFA may abandon its rulemaking process ordered by the District Court for the Northern District of California.

PACE has been seen as a game-changer for energy efficiency, especially for those with limited access to capital for efficiency upgrades and renewable energy systems. Now Freddie Mac and Fannie Mae will not purchase mortgages with superior liens, and the result will be regressive. Those that qualify for (and need) conforming loans will not be able to enjoy the benefits of energy efficiency and renewable energy system upgrades enabled through PACE that will leverage greater and greater savings over time. The ruling denies smart investments.