The White House today announced several initiatives aimed at helping households benefit from energy efficiency improvements and solar power, including two initiatives at the Federal Housing Administration (FHA) -- the agency that insures mortgages for American homeowners.
Consumer finance is a focus of energy-related policy because the ability to borrow funds is often make-or-break to a homeowner's decision to invest in efficiency work or rooftop solar, just as the ability to get a mortgage is often make-or-break to the decision to buy a house in the first place. I deem it a "sweet spot" because, even though it might sound too good to be true, improving efficiency can reduce utility expenses for the residents, improve property value, reduce pollution from power plants, and make better mortgage loans for FHA (I'll explain how below).
Reminder: FHA was created in the 1930's to help Americans buy houses -- lenders (often banks) make mortgage loans, and FHA gives the lender insurance against loan losses. FHA sets terms for loans to be eligible for insurance.
FHA announced today that borrowers can obtain additional loan proceeds at the time of home purchase or refinancing if the added funds are used to make energy-related repairs and improvements. To be eligible for the added loan proceeds, the homeowner can use of a streamlined measure of home efficiency (the Dept. of Energy's Home Energy Score) to show the improvements will reduce expenses. While the amount of added proceeds may seem small (2%), this is the right idea. Program experience should quickly provide FHA (and other lending institutions) with the information needed to consider expanding and broading the program.
FHA also announced today homeowners with FHA-insured loans may incur an additional loan through a PACE program to pay for efficiency and solar improvements. PACE is a program operated by many cities and states that allow borrowers to make loan payments through property taxes. Recent experience in California suggests homeowners can and will find this method of financing to be valuable. Experience with PACE generally has been clouded by uncertainty about whether a homeowner with a conventional mortgage loan may take out such a loan (the problem arises because property tax liens are often given superiority over prior loans).
FHA announced it will issue standards for PACE loans to be acceptable, such as subordination of the PACE lien to an FHA-insured loan, and applying consumer protection requirements like the Truth in Lending Act to the PACE loan. The greater certainty should help both homeowners and local PACE programs. Two important companies also announced the standards sketched by FHA appear reasonable and would support further growth of the programs that have already helped many thousands of homeowners (see comments of Renovate America here and Renew Financial here).
The two FHA initiatives make a ton of sense, even if one were only worried about the interests of FHA as a holder of risk on the underlying mortgage loans. Making a house more energy efficient or adding solar not only reduce utility expenses for residents, but should also add value to the house. There is an important need for better studies on this point, but existing literature support this conclusion. These factors make for better loans -- more valuable property means the house is more likely to sell for more than the loan amount, and lower utility expenses likely means a more affordable mortgage for the borrower. FHA is right to take these initatives.
The two FHA initiatives are even more compelling in light of the widespread benefits that accrue to the community and nation from improving the energy performance of our housing stock.
I think it's interesting to consider how the mission of FHA itself is justified by both direct benefits as well as broader, indirect values. The direct advantages of FHA offering loan insurance are obvious - borrowers get lower cost loans, borrowers get loans that meet FHA standards, banks get higher loan volumes, and more. But the indirect benefits to the nation as a whole are very powerful, widespread, and not always obvious - greater economic activity from a more active housing market, more efficient capital markets, better lending institutions, and more. A more active housing market enables a more mobile and efficient workforce by increasing the confidence homeowners can sell their house in a reasonable amount of time to move to take a better job, and so on. (It's more complex than that. FHA also brings risks and costs. But the illustrative point is correct).
A similar dynamic exists when homeowners (or owners of apartment buildings) make efficiency repairs and improvements (such adding insulation, or installing a high-efficiency heater) or install rooftop solar. These measures can improve the lives of residents with lower utility bills, better property conditions, greater resiliency. But the widespread benefits to the community and nation are also great, if not always obvious -- a better utility system, more valuable housing stock, less toxic pollution from power plants, and so on.
This President gets it. Over the past several years the Obama Administration has implemented several initiatives at the sweet spot of housing finance and energy improvements. For example, see:
- FHA's risk sharing deal with Fannie Mae for the important Green Refi loan to support efficiency in multifamily affordable housing.
- My earlier description of FHA's smart adoption of modern energy codes for loans secured by new houses.
- EPA's work with Fannie Mae to implement Energy Star scoring for multifamily apartment buildings.
- Fannie Mae's collection of energy information on its multifamily buildings.
The White House's announcement today includes much more than the two FHA iniatives I have highlighted here. It includes emphasis on multifamily affordable housing (for a more full description, see my colleague Deron's note here). It includes new funding and authority for the Administration's very successful loan guarantee program to support energy-related innovation. It includes needed clarity on the ability for state "Green Banks" to participate in programs that deliver project support.
Yet there is much more to do. Most pressing, affordable housing in America is ripe for energy-related improvements that deliver benefits to residents, to owners, and to the nation (see here for more on the massive efficiency potential in affordable rental housing). The nation's largest mortgage institutions, Fannie Mae and Freddie Mac, both still purchase loans without even asking if the house securing the loan meets minimal energy code requirements (see here for a more complete description). The announcements today indicate the Administration remains focused on continuing to address these important problems.