BLOG VIEW: Refueling Energy-Efficient Mortgages

t summer, I wrote an article for [i]Secondary Marketing Executive[/i] on energy-efficient mortgages (EEMs). [/b]The focus of the piece was the seeming contradiction that a product designed to encourage a new wave of energy efficiency in the residential market only occupied less than 1% of all home loans being originated. Today, things haven't changed much for that product, which has been around for nearly 30 years but never quite found its niche. That's even more confusing in the current environment, considering that the promotion of green energy and the resurrection of the housing market are twin priorities of the Obama administration. One might think that the federal government would recognize the potential of EEMs. But, of course, we all know how Washington works – or doesn't! One main reason why EEMs are not moving is because of the nature of the product. EEMs require additional paperwork, because the loans need to pass the home energy rating system developed by the U.S. Department of Energy and the Environment Protection Agency. This can be a time-consuming process that requires an extensive energy audit, and many originators don't enjoy the extra work and expense that is involved in the process. And the relative few entities that wade into the EEM waters realize the undertow is more than a little strong. Pete Milewski, director of the mortgage insurance fund for MassHousing, the Massachusetts housing finance agency, shared his experience with me in last summer's article. ‘We attempted to quantify the exact dollar value of the EEM with ratings performed by engineers,’ he said. ‘But it became so convoluted that it had very minimal activity.’ But MassHousing eventually found its EEM groove, and today, 5% of its loans involve this product. ‘It is now integrated into our loan underwriting policy to allow more flexible underwriting of debt ratios,’ he said. ‘For example, if you have a normal 41 percent debt ratio, an EnergyStar-rated project can get a 45 percent maximum debt ratio. Most borrowers get a four-to-five percent kicker.’ However, the schematics of the current market are playing against EEMs. Last summer, Lemar C. Wooley, a spokesman with the Office of Public Affairs at the U.S. Department of Housing and Urban Development (HUD), told me that Federal Housing Administration (FHA) restrictions were preventing HUD's embrace of the product. ‘The maximum amount is the higher of five percent of the property's value – not to exceed $8,000 – or $4,000, whichever is greater,’ he said, adding that the loan limit was established by Congress back in 1992 with an annual adjustment provision put into place. To date, no effort has been made to bring HUD's EEM program into the 21st century. And considering FHA's new prominence in the market, having EEMs stuck at 1992 loan limits is disastrous. If EEMs are ever going to move off the fringes of the market, significant changes are going to need to be put into place. First, the antiquated loan limits on EEMs have to be updated with all due speed. No one in Congress or the White House appears to be aware of this situation, so it would be in the best interests of the banking trade associations to reach out to the energy trade associations and create a new partnership to push for these changes. Second, it will be incumbent upon the various state housing finance agencies to pay closer attention to the MassHousing example and adapt their success accordingly. During the course of this decade, state governments ran far ahead of the federal government in establishing a greater seriousness for energy efficiency – there is no need to sell the statehouses on the value of this subject. As more people are turning to the state housing finance agencies for their mortgage needs, this will open a new opportunity to encourage regional energy efficiency while boosting the viability of individual housing markets. Third, the remaining mortgage lenders that are offering EEMs must do a better job in calling attention to their availability. Potential borrowers in need of a better marketing push (most people are unfamiliar with EEMs) and new outreach is required for the developers and builders of both residential and commercial properties (yes, EEMs can apply to commercial mortgages). Admittedly, this is a rough time to be pushing any type of a mortgage. But when the time comes for the market to turn around, EEMs have a strong potential to be an important product for an increasingly greener society. Efforts need to be undertaken to ensure they don't get left behind – again! – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]. [i] (Please address all comments regarding this opinion column to hallp@sme-online.co

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