New "Save Act" would promote better mortages and more investment in energy efficiency

U.S. Senators Michael Bennet (D - Colorado) and Johnny Isakson (R - Georgia) are expected today to introduce a bill titled "The Save Act."

This bill can be a challenge to explain, as you'll see below, becasue it involves both mortgage policy and energy efficiency -- two sexy subjects wrapped into one great bill.  The first thing to note is that the Bill is supported by a remarkable assortment of groups -- this alone is meaningful.

What does the Save Act do?  It corrects a flaw in how mortgage lenders treat homeowner energy expenses.  Or, rather, how lenders ignore homeowner energy expenses in the mortgage process.

Let me explain.  First, there is underwriting.  Before a lender makes a mortgage loan, the lender determines whether the loan applicant can afford the loan. The lender does this by following guidelines -- the lender looks at the new loan payment and other defined monthly expenses, such as property taxes and insurance premiums, then compares this total against the applicant's income. 

But -- strangely -- lenders are instructed by Fannie and Freddie guidelines to ignore the homeowner’s energy expenses.  When it comes to utility bills -- expenses every homeowner will have -- lenders assume everyone will have average expense levels.  Why?

This is obviously a relic of an era of low energy costs and a time when houses were built uniformly.  There might have been a time when loan officer time was too valuable to spend documenting household energy bills.  Today, energy expenses for any given homeowner can vary widely depending on the house they choose.  Moreover, today, verifying the level of expenses is automated, quick, and inexpensive with systems. 

The Save Act would correct this flaw, this blind-spot in underwriting.  It would require the mortgage agencies to include energy expenses when evaluating whether the loan applicant can afford homeownership.   It also would deliver to information on energy use to the consumer.  And it allows the lender to account for how differences in operating costs affect home values.

Obviously, giving the lender more information about homeowner expenses will enable Fannie and Freddie to make better loan decisions and reduce the mortgage credit risk that is, essentially, borne by the US Treasury.  But why is correcting this problem particularly important to NRDC?

Correcting this flaw in the current mortgage process will produce very valuable results in energy efficiency:   First, it will enable home buyers to shop for homes with more information about expected energy expenses.  Today, many home buyers do not know the actual energy expenses until the first full year's bills arrive.

Second, it will encourage investment in making houses more efficient.  Homeowners and builders can make sensible investing to improve the efficiency of the house – more insulation, better windows and doors, better lights, installing a high-efficiency air conditioner -- knowing that future buyers and lenders will consider the monthly savings (lower utility bills) produced by those investments.  Today, these market incentives are suppressed by an out-dated mortgage policy.  The Save Act would correct this problem.

In fact, the Save Act actually reinstates a conservative, traditional approach to underwriting.  From 1930’s forward, the Federal Housing Administration required loan officers to assess the energy expenses of loan applicants.   In addition, the standard method of underwriting commercial properties, used by all major banks and investors, includes the owner’s energy expenses as part of the affordability analysis.

Residential homes account for about 20% of our nation’s total energy use.  Increased investment in residential energy efficiency will improve our nation’s energy security and reduce toxic pollution from wasted energy.

Many people ask -- How could a lender estimate future energy expenses for a loan applicant?  Doesn't it require the lender to predict behavior?  

No. Think about the different types of loans seperately.

For refinance loans, the new loan is based on the same homeowner and same house.  The lender could look to the homeowner’s prior monthly expenses to estimate future monthly expenses.

Another large subset of loans -- loans for the purchase of new homes – frequently come with a detailed home energy audit that delivers the necessary information to the lender.

For loans for the purchase of existing homes and homes without a home energy audit, the lender could use the square footage of the house and information on the average energy use per square foot in the local region to estimate expenses.

Note that the objective is not to perfectly predict the monthly energy bills for any given applicant.  Rather, the objective is to give the loan underwriter an estimate of whether the house selected by the mortgage borrower is likely to present low, average, or high energy expenses.

We are very supportive of this Bill and very appreciative of the leadership evidenced by Senators Bennet and Isakson in introducing this Bill.