Several good news reports describe new legislation to correct how mortgage lenders treat homeowner energy expenses -- the Save Act (S. 1737) introduced by Senators Bennet (D-Co) and Isakson (R-GA). Here's a link to a very good article on the bill: The Idea Lobby (by Emily Badger).
But, across all the articles, the most interesting thing is what's missing: data! For those interested in exploring this proposal, it is critical to start with questions about what the data show.
Quick background on the Save Act:
- The federal mortgage agencies (e.g., Fannie Mae, Freddie Mac) provide lenders with guidelines to follow to make loans that the agencies will acqure or guarnatee. Almost all mortgage loans today follow these federal guidelines. These guidelines instruct lenders to assess whether the loan applicant can afford the monthly loan payment by looking at monthly income and monthly expenses. But, oddly, the guidelines instruct lenders to ignore the monthly energy expenses a homeowner is likely to have. This is a blind spot in underwriting.
- Ignoring energy expenses is a historical artifact from an era of low energy costs. The Save Act would correct this blind spot.
- Here's a link to a one-pager with some FAQs: Save Act Summary.
So why do I write that data deserves the spotlight?
To assess whether a loan applicant is likely to be able to afford homeowenership, Fannie and Freddie operate powerful systems to gather and analyze enormous amounts of borrower credit data from many sources. This helps the agencies (through lenders) make good loan decisions, and they help the agencies refine their understanding of loan performance. They constantly perform rigorous analysis of all types of credit data to understand what predicts delinquency and default and prepayment. Credit reports gathered on every borrower have mountains of data on student loans, credit cards, auto purchases, leases, even in some cases telephone bills, rental payments, and credit inquiries from transactions like store cards. This is on top of other data like credit scores, income, and more.
So, where do household energy expenses fit in this constellation? What is the relationship exactly between household utility bills and loan delinquency and default or other performance metrics? Is it changing in recent years as builders and homeowners embrace more energy efficiency materials and measures?
These are the question that the data will inform and address. More importantly, these are questions that are very difficult to answer with certainty without good data.
To be clear, there are many reasons to expect utility bills to be relevant to borrower creditworthiness. Energy expenses are a large household expense for most borrowers. Expenses vary widely from house to house depending in large part on attributes of the house, like size of the house. Anecdotes are common of people staying in houses, paying the sizable utility bills but not paying the mortgage. As a practical matter, energy expenses are required to occupy a house.
In light of these facts, the default position is to treat these regular monthly expenses in the same way as insurance premiums and property tax payments. In the abscence of rigorous data showing otherwise, it seems almost cavalier to not collect information on homeowner energy expenses.
So, while there have been several interesting news articles, what is missing are questions about what the data show. Has Fannie Mae or Freddie Mac examined whether energy expenses are related to credit risk? If so, what are the results? If not, what then is the basis for deciding to exclude energy information from the underwriting assessment?
If information about expected energy expenses would enable a mortgage lender to make a better loan decision, or enable a home buyer to make a better decision about which house to buy, is there any good reason to not simply begin to collect this data?