Welcome New Energy in Housing Finance

Greater energy and water efficiency is an unmistakable trend in housing markets. It can be seen in better state energy codes for new homes and apartments, home listings and advertisements that promote efficiency, more homes getting energy ratings, new efficiency standards for manufactured houses, criteria for “Net Zero Ready” homes, and more.

Less visible is the important work at our nation's vital housing finance institutions—Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA)—to help Americans finance the cost of making houses and apartments more energy and water efficient.

It's helpful to recall where these institutions have been. In 2007, in the final months of the prior Administration, America’s trillion-dollar housing finance system ran aground. The system of making mortgage loans appeared broken and in need of overhaul. Investors recoiled. 

Now, the ship is righted, and has been for a while. Fannie Mae, Freddie Mac, and FHA have been able to turn to strategic initiatives. These institutions are able (once again) to plan how to finance the future of housing in America. One thing is clear: The future of housing in America must be and will be more energy and water efficient.

None other than Henry Paulson is championing energy efficiency as a pathway to economic growth. Yes, THAT Henry Paulson—once chairman of Goldman Sachs, and former Secretary of the Treasury who presided over the 2007 mortgage crisis and immediate responses. In a recent New York Times opinion piece, he said, “[G]overnments must create conditions that encourage private investment in clean technologies and sustainable development.” 

What Secretary Paulson (and many others) are calling for is already underway in housing finance. Delivering mortgages secured by high-efficiency homes to investors is enabling private investment in sustainable development. But we need to do much more of it.

We can learn from the good progress in multifamily mortgages—loans to build, purchase, rehabilitate, and operate the apartment buildings that are homes for millions of American families. Consider the progress:

  • Fannie Mae and Freddie Mac each offer borrowers lower interest rates and fees if the property—an apartment building or development—meets energy or water efficiency criteria. (See Fannie Mae Green Certification and see Freddie Mac Green Rebate).
  • Fannie Mae and Freddie Mac each offer loans that provide borrowers the funds to identify and make the very repairs and improvements needed to achieve better energy efficiency. These loans allow the lender to "underwrite” the energy savings, which means they count a portion of the expected energy savings and added property value that will result from the funded improvements when making eligibility decisions. (See Freddie Mac Green Advantage and Fannie Mae Green Rewards).
  • The Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development, has also pushed ahead. Fannie Mae’s initiative was, to some extent, made possible by an FHA risk-sharing agreement. FHA offers several loan programs to encourage greater efficiency in rental property -- mostly affordable housing, where residents can benefit greatly from lower utility expenses and healthier homes. Borrowers can obtain a $5,000 rebate simply for tracking 12 months of usage information and using the EPA’s Energy Star tool to obtain a score (called “energy benchmarking”). And, FHA is proposing new policies to support benchmarking across all affordable housing.
  • Fannie Mae helped to create the very data set that powers the Energy Star system energy efficiency scores for apartment buildings.

President Obama's administration deserves credit for pushing ahead on these initiatives.

The advantages of greater efficiency are well-understood— lower utility bills for residents, less energy wasted, which improves the utility system, cleaner air and water for our country as a whole, and fulfillment of our national energy goals. The insight behind these financing initiatives is that homes (and other buildings) that are more energy and water efficient are good for lenders and the investors who hold loans secured by those properties. Other lenders have acted on this insight, too, such as Community Preservation Corp. in New York, and Community Investment Corp. in Chicago, which offer similar loan products to help their customers improve local apartment buildings, many of which are affordable housing. 

The initiatives noted are designed to make rental housing better. What about conventional mortgages for single-family homeowners? The picture here is less clear. To use a sailing analogy, you might say that Fannie, Freddie, and FHA appear to be “underway” but not yet “making way” on the goal of helping homeowners finance more energy and water efficient housing. But there is reason for optimism and more work. For one thing, Fannie, Freddie, and FHA will likely learn from the success of the multifamily lending initiatives.

The Federal Housing Finance Agency (FHFA), the federal regulator of Fannie Mae and Freddie Mac, under the leadership of Mel Watt, has proposed new guidelines for how Fannie Mae and Freddie Mac should help homeowners finance improved energy efficiency as a way to fulfill affordable housing obligations. This is called the “Duty to Serve” rule because Fannie and Freddie have a “duty to serve” Americans in need of affordable housing. Also, FHFA, as part of its annual “scorecard," directed Fannie Mae and Freddie Mac to identify how to help homeowners generally to finance energy and water efficiency investments.

Fannie Mae, Freddie Mac, and FHA each have implemented loan products tailored to finance home improvements to improve energy and water efficiency – Fannie Mae’s recent HomeStyle loan and FHA's Energy Efficient Mortgage are examples. These loans have, so far, not delivered. That is NOT bad if the trials and experimentation are part of a process of innovation.

Here's the big picture. Improving the energy and water efficiency of America’s housing is a market reality and a strategic imperative. Our nation’s valuable housing finance institutions appear to be turning to execute on this goal. I've highlighted here some of the good work of Fannie Mae, Freddie Mac, and FHA, for which they deserve credit, but there is much more to do—more experimentation, innovation, and leadership.

About the Authors

Philip Henderson

Senior Financial Policy Specialist, Center for Market Innovation

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