If you could save up to $200 a month in energy bills for 30 years, would you be willing to borrow an extra $5,000 for a home loan upfront? Probably yes.
That’s the power of energy-efficient mortgages, or “green” mortgages. Now, legislators, lenders, brokers and consumers are pushing for their wider use. Advocates say green mortgages can help solve several of the nation’s broader problems, including the energy crisis, the mortgage implosion and the slowing economy.
“These programs can offer significant solutions,” said Norm Ferrier, owner of Security Mortgage Corporation, which specializes in green loans, “because homeowners are desperately seeking ways to lower their energy costs.”
Green mortgages save money and energy over time by improving energy-efficiency
Green mortgages allow home buyers to add as much as an additional 15 percent of the sale price into the loan, for upgrades such as energy-efficient windows, water heaters, or solar panels. The savings in energy bills offset the higher monthly mortgage payments and create more savings in the long run.
Since the 1970s, major lenders backed by Fannie, Freddie, and the VA, have financed green mortgages, which are currently promoted under the Energy Star program. But these products languished during years of cheap oil and easy, sub-prime loans. Lenders and brokers avoided green loans because they took longer to close, but yielded no extra profits.
Now, as the energy crunch and mortgage crises converge, lawmakers and lenders regard green mortgages as a solution to both. Residential and commercial investors also see new opportunities in green loans. “We are an emerging market at a time when the traditional market has imploded,” said Jeffrey Cole, founder of myenergyloan.com. “The secondary market is embracing green mortgages.”
Legislators are rushing to support green mortgages. The Housing and Economic Recovery Act of 2008, signed by President Bush last month, includes a provision to streamline and promote green mortgages. The bill authorizes federal agencies to identify obstacles to existing products, recommend changes and educate the public.
Another federal bill would provide incentives to lenders offering lower interest rates on green residential and commercial mortgages. The Green Resources for Energy Efficient Neighborhoods Act, introduced by U.S. Rep Ed Perlmutter (CO-07), passed the House Financial Services Committee in June and now awaits a House hearing.
A sign of green appeal across industries, the bill was broadly supported by 30 national organizations, including lenders, real estate agents, developers, housing groups, environmentalists and scientists. “We are at a crossroads with our housing markets and our energy consumption,” said Leslie Oliver, communications and policy director for Rep. Perlmutter. “There was incentive and buy-in from organizations across the board.”
Texas legislators also recently passed a bill to develop energy ratings for homes, similar to fuel efficiency ratings for cars. This would create uniform lending and appraisal standards, making it easier to process such loans, said Harold Hunt, research economist at Texas A&M University’s Real Estate Center, which is working on this mandate.
Some states are enacting bills to promote green mortgages to buyers in diverse markets
Other states—such as New York, Vermont and California—have also enacted bills to promote green mortgages. But federal policies and infrastructure are needed to support state initiatives in the long term, said Security Mortgage’s Ferrier, who works with legislators to craft policy.
Consumer demand is also driving the push for green mortgages. While not disclosing the actual dollar value of loans closed, Cole of myenergyloan.com said that mortgage volume for green loans had risen 25 percent this year over last year.
Much of this growth is coming from the commercial market, said Cole. Last year, the bulk of the loans were residential, but this year, sixty percent are commercial. Many developers have been inquiring about green loans, not just to develop green buildings, but also to finance retail consumers when the units are ready, he said.
Business opportunity is so great, said Cole, that he and another partner are raising $10 million to fund the nation’s first green real estate finance bank. They hope to launch by October. “There is a lot of light on this market,” said Cole.
Ferrier of Security Mortgage notes that 70 percent of the country’s homes can benefit from energy efficiency upgrades. “This translates into an astounding 51 million residential homes that can qualify for energy upgrades,” he said.
A thriving green mortgage market could have multiple effects on the economy, said Ferrier. “They will address the energy crisis, by reducing the energy outlay by homeowners by anywhere from 30 to 50 percent, guaranteed. They can address the economy, by creating disposable income that far exceeds any stimulus package, because we save clients anywhere from $20 to $200 a month, year after year. It will address the mortgage implosion, because it has the potential to effectively create one of the biggest refinance booms in our history.”
“They offer not a pie-in-the-sky solution,” Ferrier said. “They’ve been tried, tested and proven.”