Adding A Touch Of Green To Mortgage Underwriting

11625_greenorb Adding A Touch Of Green To Mortgage Underwriting REQUIRED READING: Fans of the Muppets know that Kermit the Frog's theme song is ‘It's Not Easy Being Green.’ But if the celebrated amphibian worked in mortgage banking, he might be humming the tune ‘It's Not Easy Underwriting Green.’

‘The biggest challenge I'm seeing has been the inability of many mortgage underwriters to fully understand how to properly identify and apply the benefits of modern green technology to the financing of these properties for consumers who want to purchase net-zero energy-efficient homes,’ observes Marx Sterbcow, managing partner with New Orleans-based Sterbcow Law Group LLC. ‘And even if the mortgage underwriter understands and applies the benefits, they are often overruled because the federal agencies who are backing the mortgage products can't identify and apply the benefits in the government's own underwriting and purchase of the properties.’

This situation might be changing. According to McGraw-Hill Construction's recent ‘Green Home Builders and Remodelers Study,’ green homes comprised 17% of the overall residential construction market in 2011 and are expected to grow to between 29% and 38% of the market by 2016.

‘The results of our study show that despite the drastic downturn in housing starts since 2008, green has grown significantly as a share of activity – indicating that the green market is becoming an important part of our overall economic landscape,’ says Harvey M. Bernstein, vice president of industry insights and alliances with McGraw-Hill Construction.

The push toward green housing has also found an ally in the U.S. Department of Energy (DOE). Thanks to funding from the DOE's Office of Energy Efficiency and Renewable Energy (EERE), Sandia National Laboratories and solar integration firm Solar Power Electric recently developed and released PV Value, an electronic form designed to standardize appraisals for properties with solar photovoltaic (PV) systems. This tool is designed to provide appraisers, real estate agents and mortgage underwriters with more accurate values of PV systems and prevent PV installations from being ignored or undervalued in transactions.

Furthermore, the issue of green underwriting has also produced a relatively rare example of congressional bipartisanship. Last October, Sens. Michael Bennet, D-Colo., and Johnny Isakson, R-Ga., introduced the Sensible Accounting to Value Energy (SAVE) Act, which is designed to encourage underwriters to consider measures taken by homeowners to reduce energy consumption and improve energy efficiency. In announcing the proposed legislation, Isakson cited his private-sector career in real estate when highlighting the bill's goals.

‘As someone who has 30 years of experience in the residential real estate industry and who has lived through multiple recessions, I understand that recovery in the housing market and job creation in the construction sector are pivotal to getting our economy back on track,’ said Isakson. ‘I place my support behind this bill because it has the potential to create jobs without any cost to taxpayers, and it will also improve mortgage underwriting in this country by including energy as a factor in the process.’

‘The SAVE Act would help provide access to useful information about energy usage that homeowners, buyers, appraisers and underwriters want and need,’ added Bennet.

Sterbcow points out that the legislation could change underwriting significantly.

‘The SAVE Act language, if adopted, would 'require all federal lenders to consider projected energy efficiency when underwriting mortgages,'’ he says, adding that this would apply to all federal mortgage loan entities.

However, the push for improving and expanding green underwriting has received pushback from other areas of the federal government and from the private sector. Yet those who seek to bring a green hue to the subject insist they are ready for the challenge.


The issue of reconfiguring underwriting standards for green residential property is not new. In 2009, Rep. Chris Van Hollen, D-Md., introduced the Green Resources for Energy Efficient Neighborhoods Act (GREEN Act), which was designed to have the U.S. Department of Housing and Urban Development (HUD) establish annual energy-efficiency participation incentives for HUD programs to achieve substantial improvements in energy efficiency. However, the GREEN Act stalled in Congress as Capitol Hill focused on crafting the colossal Dodd-Frank Act.

More successful activity was found beyond Washington. The Property Assessed Clean Energy (PACE) program, in which the cost of energy-saving home improvements is paid back as part of the homeowner's annual property taxes via a special assessment on the home, was created in Berkeley, Calif., and quickly spread around the country. By July 2010, PACE programs were in place in 22 states and the District of Columbia.

But during July 2010, the Federal Housing Finance Agency (FHFA) abruptly announced that the PACE program posed safety and soundness concerns for Fannie Mae, Freddie Mac and the Federal Home Loan Banks because the first liens established by PACE loans allegedly generated significant risk management challenges for lenders, servicers and securities investors. As an independent agency, the FHFA decided to set its own course – ignoring that the Obama administration made the encouragement of green energy and the revitalization of the housing market its twin domestic priorities. Cathy Zoi, assistant secretary for the DOE's EERE, told The New York Times that the administration was unable to persuade the FHFA to accept mortgages carrying PACE liens.

‘The FHFA statement effectively halted state PACE programs by causing Freddie Mac and Fannie Mae to completely avoid mortgages associated with PACE loans,’ recalls Mark Milam, senior mortgage banker at Atlanta-based Fidelity Bank. ‘States, environmental groups and other PACE advocates have filed several lawsuits against the FHFA seeking injunctive relief which would have restarted the programs. In one such lawsuit, a federal district court issued an order to FHFA to initiate a notice-and-comment rulemaking to offer guidance about how lenders should deal with PACE loans. The agency posted the proposed rule in the Federal Register on Jan. 26 and said it will accept comments through March 26.’

Bill Garber, director of government and external relations for the Appraisal Institute, recognizes the challenges in upgrading underwriting standards at this point in time.

‘The current housing crisis is not helping,’ he says. ‘And there is not a lot of gumption on Capitol Hill to throw money at programs. Also, there has not been a whole lot of specific emphasis placed on this issue by the federal housing agencies. The industry is left to advance the issue because no agency wants to take the lead on it.’

But Garber acknowledges the industry is having its own problems with the subject.

‘We hear about an awful lot of problems with communications between lenders and appraisers,’ he says. ‘We hear frequently that basic information on a property – the building plan, Home Energy Rating System (HERS) information, improvements that were made – are not released to appraisers.’

Brian C. Coester, CEO of Rockville, Md.-based Coester Appraisal Group, believes that obtaining the information is the least problematic aspect of the issue.

‘We have the data on the subject – it is pretty easy to get,’ he says. ‘The problem is with underwriting and value – specifically, in getting comparables. From the appraiser's perspective, having the utility bills, the High Efficiency Particulate Air rating and energy-efficiency items allows underwriters to make the adjustment to the loan process. The challenge is putting a value on green – we don't have information on comparables. The underwriter is saying, 'What am I basing this off of?' If you cannot get data on the comparables for an appraisal, it doesn't exist.’

Coester shares Garber's disappointment that the mortgage banking industry has not been more proactive on the subject.

‘The mortgage industry has dropped the ball,’ he says. ‘The Appraisal Institute has a form to assist homeowners. I think that form should be required as part of selling homes – it should be uploaded to multiple listing services and given to underwriters.’

Home green home

But that is not to say that green underwriting is not being done. Spencer Scarboro, senior vice president of loan originations at State Employees' Credit Union in Raleigh, N.C., notes that his institution routinely provides underwriting for borrowers who are seeking to incorporate energy efficiency into their mortgages.

‘It is no inconvenience to our staff to underwrite these types of loans,’ he says. ‘The underwriting is pretty much the same – we require the ENERGY STAR rating certification, which is a very easy document to obtain. This lowers the energy costs going forward, which allows for a little more deviation on qualifying ratio. Keeping energy costs down means homeowners have more income to pay other bills.’

Scarboro's institution is part of the North Carolina Energy Efficiency Alliance, but it was only one of two lenders when it held its first summit meeting in 2010. The credit union does not market its green mortgage underwriting, but rather relies on word of mouth and networking with appraisers and builders in the alliance to bring in new business.

‘There are not a lot of lenders in North Carolina with green mortgage programs,’ Scarboro says, adding that he is unsure why such programs are not more popular in his state. ‘They may not see it as a moneymaker yet. As a credit union, we are not motivated by profit – we want to make sure our members' lives are better. With this, we help to lessen energy expenses.’

Mark Moore, senior loan officer at The Moore Team, based in Decatur, Ga., observes that energy-efficient mortgage (EEM) programs have been around for years but have never been achieved mainstream popularity.

‘There are pockets of interest in it,’ he says. ‘The current EEM products offered by the Federal Housing Administration and the U.S. Department of Veterans Affairs have never been very well advertised. I get one or two phone calls a year asking for an EEM. However, there might be more appetite than the number of calls reflects.’

As for the SAVE Act, its fate is also uncertain – there is no equivalent legislation in the House of Representatives, and the partisan rancor within the current Congress has made it difficult for legislation to move forward.

‘Any time you get an act of Congress is no small thing,’ says Robert Sahadi, director of energy-efficiency finance policy at the Washington, D.C.-based Institute for Market Transformation. ‘Congress just fixed the federal underwriting guidelines, and now they need to remove this blind spot.’

Sahadi notes that even if the SAVE Act is not enacted before the congressional session ends, it nonetheless carries a wide spectrum of support – the U.S. Chamber of Commerce, the Natural Resources Defense Council, the National Association of Manufacturers and the Center for American Progress are among the diverse entities supporting it. And, ultimately, Sahadi believes that upgrading underwriting to accommodate energy efficiency will also encourage another shade of green.

‘Making it easier to finance the purchase of energy-efficient homes will increase the flow of investment in new construction and in renovation to existing homes,’ he says. ‘This directly creates jobs. There would be at least 20,000 new jobs created, at no cost to the taxpayers.’

Coester concurs. ‘By putting a value on specific energy-efficiency improvements, it will make a significant difference in the housing recovery process,’ he says.

However, Milam is more cautious.

‘The bottom line for most entities will be financial,’ he says. ‘If protecting the environment is accompanied by a substantial up-front savings, then green initiatives will be far more successful. But selling these programs based on long-term savings or utility-bill reductions will not provide the broad impact legislators desire.’

Furthermore, Milam believes that in the current economy, green mortgage banking might be most successful by focusing on renovation.

‘Due to waning property values, many homeowners cannot sell their homes to purchase their 'move up' house,’ he says. ‘Instead, they are choosing to renovate their existing home. These renovations create jobs and tax revenue. It would make much more sense to offer income-tax incentives for green renovations and reward those lenders who choose to participate in environmentally friendly renovation programs. By providing incentives for renovation loans, we don't increase the already bloated inventory of new homes.’

Phil Hall is editor of MortgageOrb.

(Photo courtesy of USPS)


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