Growing Your Business With Green Mortgages

Would you like fries with that?

An energy efficient house with solar panels thanks to green mortgage lending.

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National Mortgage Professional Contributing Writer

Here’s a sobering statistic: Home owners spend a larger percentage of their incomes on energy costs than on property taxes or insurance.

That’s right. According to the U.S. Department of Energy, we spend 7.1 percent of our net incomes on energy vs. 4.8 percent on property taxes and 4.2 percent on homeowners insurance. Folks who earn less than $15,000 annually pay more than 15 percent of their energies for energy. Yet what do we complain about more? And which ones do we take into account when we apply for – or take an application for – a mortgage?

“It’s a real blind spot,” Madelina Salzman, a management and programs analyst in the DOE’s Building Technologies Office, said during a recent webinar hosted by the National Housing Conference in partnership with the Rocky Mountain Institute,

Here’s a couple of other numbers from DOE, figures which should set your antenna wiggling, especially if you are concerned with climate change: The nation’s 98 million single family houses represent 95 percent of all our buildings and account for 21 percent of our total energy use and omissions.

And finally two more big numbers: Half the country’s houses were built 40 or more years ago before there was ever any such things as energy codes. And our houses sustained $95 billion in extreme weather-related damage last year, with this year’s total expected to be even higher.

Renovation Rising

I relate all this because a huge untapped market opportunity awaits lenders and originators who can navigate the maze that currently shrouds the financing of much needed energy-related home improvements. Attempts to boost the sector have been tried before, but they’ve pretty much fallen on their keisters.

Now, though, a confluence of necessity and opportunity presents itself to those who want to take advantage of it. In the face of an ever-intensifying climate crisis, many houses need energy upgrades, and the potential for delivering affordable financing is at hand. Whereas most owners rely on cash savings to make energy-related improvements, convenient, low-cost financing options can drive the market. And Fannie Mae and Freddie Mac can lead the way in promoting sustainable, resilient housing.

Over the years, the agencies have had so-called energy saving mortgages. But they were basically oxymorons: They may have saved borrowers money, but the effort expended to find a lender and go through the mounds of paperwork didn’t save anyone any human energy. In other words, they were just too difficult to originate.

In the last year or so, though, both GSEs have launched new and reconstituted what are now called Green Mortgages. Fannie’s Home Style Energy program and Freddie’s Green Choice product are remarkably similar and among the lowest cost of capital available. In a nutshell, the programs allow consumers at purchase or refi to finance the cost renewable energy improvements, cost-effect energy efficiency measures and resilient upgrades for up to 15 percent of the as-completed value of the property.

Millions Affected

According to a Rocky Mountain Institute report, the 10-year impact of a robust green mortgage market could have an enormous impact. Some 8.7 million houses could be improved, leading to $12 billion is net savings to consumers, 630,000 jobs and 57 million metric tons of cumulative carbon emissions avoided. More specific to readers here, it could also result in $2.2 trillion in green mortgage-backed securities.

The Biden Administration can do its part in making green lending more popular.

But while these programs are well positioned to offer among the lowest costs of capital and at a convenient intervention point for would-be borrowers, they “are far behind the market,” reported Rita Ballesteros, a housing industry consultant who once worked with Fannie Mae, where she led the affordable housing preservation activities for its Duty to Serve initiative. For example, she said, Fannie has been the world’s largest Green MBS over the last four years, yet it has issued just $7.2 billion in those bonds – but only $111 million in single-family loans.

The Biden Administration can do its part in making green lending more popular. For one thing, said Greg Hopkins, a manager in the RMI’s Carbon-Free Buildings Program, it could take a “more holistic” approach by including Fannie and Freddie and their overlord, the Federal Housing Finance Agency, in an overall effort with other government agencies. And he advocated what he called “a big table approach” by also including green building organizations, lenders, realty groups, builders and appraisers in their drive toward data “commonalities.”

“This is the moment to climate-align federally-supported housing finance,” Hopkins said. “Federal policy can leverage the power of financial markets. Our hope is that the FHFA, under its new leadership, will start to recognize that a mortgage can be a prime tool for decarbonization nationwide. And by integrating nationally standardized data, automated GSE systems can streamline adoption.”

Here’s the kind of automated process the RMI official is talking about: When David Heslam of Earth Advantage, a national leader in developing home energy labeling systems, recently refinanced his house, the Rocket Mortgage loan officer asked as a matter of course if the place had solar energy. It didn’t, but the former builder wished it had, bringing on the next questions. “Do you want it?” and “Do you want to rolle the cost into your new mortgage?”

It was that seamless, just like at McDonalds, where cashiers always ask if “you want fries with” that because the hamburger palace’s systems are set up to up-sell. And ultimately, Heslam believes, it’s up to individual lenders and loan officers to take that same next step by making it easier for them to take a loan to the next level – a green one.