White House and HUD announce PowerSaver, a smart new loan program. FHA on the right track (although details will be very important to program success).

The White House announced today a new HUD/FHA loan program to help homeowners invest in making their houses more energy efficient.  This program is strategically smart, badly needed, a very good use of HUD’s authority, and presents very manageable risks.

Please see here for a short paper on why a loan program is needed, and why it is a market-based solution to the problem.  Home Improvement Loan Fact Sheet 11-01.pdf.

In a nutshell, investing in energy efficiency makes a ton of sense from the homeowner’s perspective, but the market is broken.  The federal mortgage programs (especially Fannie Mae, Freddie Mac, and FHA) have a terrible blind spot when it comes to the “operational costs” of the house, the total cost of homeownership.  Lenders are not accustomed to accounting for lower monthly utility bills (or lower transportation costs, for that matter), even though these costs are important to determining whether the home is affordable.   

The fact that lenders ignore the savings produced from efficiency inhibits the homeowner from making investments in home improvements, and it discourages a new home buyer from paying true market value for a more efficient house.

HUD and FHA are well-placed to correct for these market failures and to demonstrate how lenders should approach energy efficiency.  The pilot program announced today (see www.hud.gov), if implemented with the right guidelines, could provide private lenders and investors with a track record of performance data to support new loan products and corrections to the blind-spot in the existing mortgage process.

Some critics might wonder about the wisdom of new programs in the mortgage sector at this time.  This program should alleviate those concerns.  It is evidence that FHA is thinking correctly about risk and value.  A homeowner’s equity in the house is the touchstone of loan risk.  If structured correctly, these loans will enable homeowners to invest in making their homes more valuable, more livable, and more affordable.  Moreover, where the federal government (through Fannie Mae, Freddie Mac, or FHA) already holds the risk on the first-lien loan, adding value through home improvements will improve the federal program’s position.

Obviously, it is early and there is much to learn about the program details, and some corrections will surely be required.  The details of implementation are very important.  But the key point is that the risks are manageable and the potential benefits are very large.

Secretary Donovan and his team, including Stockton Williams and Vicki Bott, should be congratulated.