Mortgage banking is not lacking products that lay around for years before someone realizes their potential is not being fully tapped. Energy efficient mortgages (EEMs) fall into that category, and clearly the time is right for this product to get a second look.
EEMs combine a traditional mortgage with savings relating to energy-related home maintenance costs. As it is designed, the EEM is supposed to enable borrowers to save money on their utility bills by allowing them to finance the cost of incorporating energy-efficiency features into their residence; the EEM also saves the borrower from taking out a separate loan to cover installation costs. EEMs are applicable to either the purchase of a new home or in the refinancing a mortgage.
EEMs have been around since the 1980s and were modeled on the home energy rating system (HERS) developed by the Department of Energy and the Environmental Protection Agency. Yet EEMs constitute less than 1% of all current residential mortgages.
Today, in view of the state of energy and housing in the U.S., EEMs seem like a wonderful idea. Home heating costs and electric rates are showing no signs of coming down, and the alternative energy industry is enjoying a new boom as more people are seeking ways to combat the escalating costs related to heating, cooling and electrical power. In many markets, the push to encourage the use of alternative energy technologies in residential properties is highly aggressive (California, Arizona, Nevada and New Jersey come to mind).
But alternative energy technologies have a major drawback: they carry expensive up front costs. While a combination of federal and state incentives can help ease the crush of their price tag, the borrowers still have to shell out a good chunk of change to bring alternative energy solutions to their homes. And that's where the EEMs can come in.
For lenders who are trying to stand out from their competition, let alone shore up their bottom lines, EEMs offer a great appeal and more than a little publicity. This past weekend, USA Weekend noted Bank of America, Citigroup and JPMorgan Chase's efforts in this sector. But the lender doesn't have to be a major money center bank to get in on the action. Smaller yet savvy financial institutions can follow the lead of New Resource Bank in San Jose, Calif., which opened in November 2006 with a great flurry of national publicity by offering an innovative a lineup of home equity loans that encourage the installation of solar panels.
But these loans don't have to be limited to solar energy, of course. Homes that incorporate wind power, geothermal systems, microhydro and/or biomass heating systems could qualify for EEM consideration.
Even better, EEMs are already welcomed in the secondary market: Fannie Mae and Freddie Mac have been purchasing EEMs for some time. Furthermore, this product goes across the board to all levels of lending: EEM programs exist within the Department of Housing and Urban Development, the Federal Housing Administration, and the Department of Agriculture's Rural Development Section 502 homeownership loan program.
Of course, building an EEM program will clearly take time and (pardon the pun) energy to create. There will also be the need to alert customers of their potential – even at this relatively late date, many borrowers are unaware this product has been around for two decades.
But for lenders seeking to expand into new product offerings and to attract new customers, EEMs seem like a progressive strategy that deserves further investigation.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com)
