Energy Efficient Mortgages: Is Their Time At Hand?

When Kermit the Frog sang ‘It's Not Easy Being Green,’ he wasn't referring to energy efficient mortgages (EEM) – though it would've been a good fit. The product has been around for more than two decades yet never truly resonated as a popular mortgage offering. However, there is a chance the EEM could enjoy a new degree of popularity in 2007.
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EEMs are unique in their capacity to combine the traditional loan product with savings relating to home maintenance costs. The concept of the product is to enable borrowers to save money on their utility bills by enabling them to finance the cost of adding energy-efficiency features to new or existing housing, as part of either a new home purchase or a refinancing mortgage. This would save the borrower from taking out a separate loan for energy improvement installations.

EEMs were first offered in the 1980s and were modeled on the home energy rating system (HERS) developed by the Department of Energy and the Environmental Protection Agency. According to Norm Ferrier, branch owner of Interactive Financial Corp. in Lansing, Mich., the process of having the HERS rating done on properties is sometimes seen as excess work for the lender, which is why the product has traditionally not been actively promoted.

‘There is a learning curve involved,’ says Ferrier. ‘It's not a cumbersome process, but it requires having the right team in place to address these issues appropriately.’

However, last year's dramatic rise in fuel prices helped increase the awareness of the product.
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‘When you've have a spike as we've had with energy and home heating, these products get dusted off,’ says Stuart Tyrie, vice president at Wells Fargo Home Mortgage. ‘The last time I remember they were being talked about so much was in the mid-90s.’

Tyrie also credits a sudden jump in media attention for helping to bring energy efficient mortgages back to the spotlight. ‘Without the media, many folks don't even know this stuff exists,’ he says.

The product is not exactly a fringe item. Both Fannie Mae and Freddie Mac purchase energy efficient mortgages, while the Department of Housing and Urban Development, the Federal Housing Administration and the Veterans Administration have their own energy efficient mortgage programs. The most recent addition to this sector is the U.S. Department of Agriculture's Home Energy Advantage program, launched last June to increase the buying power for applicants purchasing energy efficient homes under the USDA's Rural Development Section 502 homeownership loan program.

However, the market for these products is still tiny. The New York Times recently estimated that less than 1% of all loans are energy efficient mortgages. So why haven't they taken off?
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‘It's an unfortunate fact that energy efficient mortgages are the best kept secret in the mortgage industry,’ says Steve Baden, executive director of Residential Services Energy Network (RESNET), a non-profit partnership between the national mortgage industry, Energy Rated Homes of America, and the National Association of State Energy Officials. ‘Most people are not aware of them – neither consumers nor lenders.’

Baden adds no one truly gave EEMs the level of educational or marketing awareness that other products have enjoyed, especially during recent years when other products helped fuel the housing boom. ‘We've been in one of the most incredible real estate transactional periods in the nation's history, and they probably got lost in the noise,’ he says. ‘They just didn't appear on the radar screen.’

Yet Baden believes time is the EEM's ally. ‘As the market slows down, lenders are now looking for tools to differentiate themselves from the competition,’ he says.

There is already jockeying for the lead in this area. New Resource Bank, a de novo institution in San Jose, Calif., opened its doors last November with a trio of products to encourage the installation of solar panels: the Solar ARM (a 25-year home equity loan), the Solar Flex (a 25-year home equity loan with interest-only payments in the first 10 years) and the Solar Fixed (a 15-year home equity loan with a fixed interest rate). Indy mac

According to Peter Liu, founder and vice chairman of the bank, the energy-friendly products were an immediate hit. ‘We had a very strong reaction,’ he says. ‘We will introduce additional clean energy- and efficiency-related financing in 2007.’

Also taking a green step forward is State Employees' Credit Union in Raleigh, N.C. Last September, it began offering its Green Mortgage Program with expanded debt-to-income ratios, a 50% reduction in origination fees and 100% financing for qualifying members. Even Fannie Mae is getting greener: Last November, the GSE and a subsidiary of the bond firm Cantor Fitzgerald jointly secured a patent on a system that verifies greenhouse-gas-reduction credits earned by homeowners.

One market sector responding to these products is homebuilders, who stress energy efficiency as a means of promoting their properties. ‘Builders are always looking for an edge,’ says Tyrie at Wells Fargo.

Still, Tyrie isn't proactively trumpeting EEMs. ‘We're reacting to the need in the market,’ he says. ‘It's like a chick-and-egg scenario: if we see the need is there, we talk about it.’


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