Several weeks ago HUD announced the PowerSaver program, a pilot program to allow FHA to insure home improvement loans intended to create energy savings for the homeowner.
The underlying concept makes a ton of sense: Homeowners making improvements that lead to lower monthly utility bills, such as adding new insulation, may be better borrowers than homeowners who use loan proceeds to add a new bathroom or renovate a kitchen (all other things equal). This is because reduced monthly utility bills should offset the financial burden of the new loan payment. A homeowner adding a new bath, on the other hand, could have a new loan payment plus increased utility costs. This concept needs to be proven.
We commend the leadership of Secretary Donovan and the FHA team for making this program a reality, and we have recommended HUD make several revisions to the pilot. (NRDC's full comments.) One recommendation is particularly important and worth highlighting here: FHA should account for the energy savings expected from the funded home improvements by requiring a home energy rating.
HUD's proposed approach permits PowerSaver loans to fund any improvements on FHA’s list of "eligible measures" with no energy audit or rating. This is a problem because all houses are not the same. A specific home improvement might make sense in one house, paying for itself in a matter of months from lower utility bills, but in another house, the same measure might not lead to meaningful energy savings. To illustrate the point, a new Energy Star air conditioner might produce substantial savings when replacing an old machine, but little or no savings if the homeowner installs it to cool a newly finished attic.
A better approach for the pilot program is to permit only home improvements that will produce energy savings as assessed and verified by a certified home energy rater. This would allow FHA to account for the expected savings and define the appropriate credit policy. FHA might decide, for example, to allow only improvements that are cost effective or that offset the loan payment by a certain amount.
The PowerSaver pilot could help test and demonstrate an important concept that could lead to better, more precise underwriting for FHA insured loans and in the broader mortgage market. To accomplish this, the loans made in the pilot and the information collected must match the credit policy questions presented. A home energy rating will provide the needed information, we believe that the entire mortgage industry, especially the federal mortgage programs, could learn from the results.