The Mystery Of The Energy-Efficient Mortgages

Energy-efficient mortgages (EEMs) seem like a great idea, but they have taken a very long time to catch on with lenders and consumers.

EEMs allow home buyers to qualify for larger mortgages for the purchase of new homes that have ENERGY STAR certification. According to ENERGY STAR – a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy – the term EEM also can refer to energy improvement mortgages, which cover energy efficiency improvements that borrowers plan to make to existing homes. These mortgages allow the borrowers to qualify for the larger loan amount because the savings on their future utility bills will eventually offset the energy-related improvements and are considered income.
So why aren't borrowers clamoring for these EEMs? And, for that matter, why are so few lenders promoting them?

‘It is a rather small market,’ says Spencer P. Scarboro, senior vice president of loan originations at State Employees' Credit Union in Raleigh, N.C. ‘We process just a handful of these loans a year.’

Scarboro adds that the credit union offers EEMs with a loan origination fee capped at $350. Still, except for a few consumers who are well educated, upscale and environmentally enthusiastic, borrowers generally have not heard of these mortgage financing incentives because lenders are not marketing them.

‘No one is spending a lot of money on advertising the advantages of purchasing these types of homes, and there are few lenders offering EEMs, so there is not a lot of attention being generated by the lenders,’ Scarboro explains. ‘Lenders aren't adopting these programs because there is little demand, and they can direct their resources to more profitable product lines.’

One drawback is that the EEM process involves a level of extra paperwork connected to the product. The borrower has to have a report prepared by an energy consultant using a Home Energy Rating System (HERS) before the financing is approved.

Some might balk at the HERS as a time-consuming extra step, but they shouldn't, says Bobbi Glassel, facilitator and project manager for Synergy Energy Services in Sacramento, Calif.
‘When home inspections first came out, Realtors didn't want home inspections because that would just complicate or stop a transaction,’ she says. ‘But now, very few homes are sold without a home inspection. Let's face it: there are lenders and Realtors out there who just want to get the deal closed.’

Also, EEMs come with loan limits. According to the Federal Housing Administration Mortgagee Letter 2009-18, the maximum amount of the portion of the EEM to be used for energy improvements is 5% of one of these: the value of the property, 115% of the median area price of a single-family dwelling, or 150% of the conforming Freddie Mac limit, whichever is the smallest amount.

Kelsey Mullen, director of residential business development for the Washington, D.C.-based U.S. Green Building Council (USGBC), says consumers are demanding more energy-related products and services, and lenders should pay attention to this growing market.

‘It is similar to how builders adopted the green building process,’ Mullen says. ‘It's not about adding on an expensive system. It's about building differently.’

Today, builders are constructing more homes that are energy efficient. According to ENERGY STAR, more than 130,000 ENERGY STAR-certified new homes were constructed in 2011, or 26% of housing starts in the U.S. In 2010, that figure was 126,000 homes, or 25% of new homes. Energy-efficient retrofits were up, too, with more than 50,000 homes in 2011, compared to 35,000 in 2010.

Consumers are interested in green homes. According to the Yahoo! Home Horizons 2012 study, 81% of 1,545 U.S. adults surveyed say that owning a home is still a part of the American dream, and 50% of people consider green/energy-efficient appliances and materials a requirement of their dream home, more important than water views (38%) and mountain views (32%).

Mullen stresses that lenders, as well as appraisers, need to see the value in energy-efficient homes.

‘I had a conversation with an appraiser who said he needs a comp set of 1,000 energy-efficient homes to feel comfortable enough to value these,’ Mullen says.

The USGBC collaborated with the National Association of Realtors and other groups to design the Green MLS Toolkit to help home buyers find green homes and also to help appraisers value the homes.

‘As green is becoming more of a vernacular in the home-buying experience, people begin to demand it and builders accommodate it, and the industry will respond with these changes,’ Mullen says.

Glassel says she facilitated about 150 EEMs in 2011. However, she acknowledges that some lenders are better than others about getting the word out about the program.

‘I'm not sure why real estate professionals aren't more aware of the EEM,’ she says. ‘I have had people who have been in the business for years and never heard of EEM.’

Nora Caley is a freelance writer based in Denver. She can be reached at


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