It is common knowledge that upgrades, such as granite countertops, high-design fixtures or a new outdoor deck, add value to a home appraisal. However, a range of improvements have gained momentum in recent years that have been left out of the equation. Energy-efficiency measures can save homeowners money with lower monthly utility bills but, unfortunately, federal mortgage underwriting and appraisal processes don’t recognize the value associated with these improvements.
Now a coalition of environmental organizations and home builders is supporting proposed legislation that seeks to correct this oversight. If passed, the SAVE (Sensible Accounting to Value Energy) Act would require expected energy costs and savings to be added to the home-affordability calculations for all federal agency-backed mortgages.
“The act puts everything on a level playing field by changing the process of how we look at the inventory of a home and establishing fair value,” explains Jared Asch, national director of the San Francisco-based nonprofit Efficiency First. “In the same way that property values rise over time and we allow appraisers to calculate that, we know overall energy costs will continue to rise in the next 10 to 50 years. It makes sense to have appraisers adjust for energy-saving features that offset these costs and benefit the homeowner.”
The SAVE Act is designed to apply to new construction and retrofits. Greg Bergtold, advocacy director for Dow Building Solutions, an organization within The Dow Chemical Co., Midland, Mich., says the act could affect a significant number of existing homes. The Washington, D.C.-based U.S. Department of Energy estimates there are a total of 116 million homes in the existing U.S. building stock, and the Joint Center for Housing Studies at Harvard University, Cambridge, Mass., reports that in 2007 the housing stock’s median age was 32 years.
“There have been great changes in energy codes in the last few decades, which means approximately 30 to 40 million homes were constructed before the U.S. had modern baseline energy standards,” Bergtold explains. “By ascribing value to energy-efficiency upgrades, the SAVE Act will help scores of homeowners see the merit of making the upfront investments, and this is a critical missing link in consumer awareness.”
Westborough, Mass.-based Conservation Services Group (CSG) designs and implements energy-efficiency programs, as well as provides new construction, training, and certification services for builders and contractors. Caitriona Cooke, CSG’s New England construction manager, notes that although the residential energy audit business has grown enormously in the past five to six years, some large gaps in the industry remain.
“There’s a whole world of residential remodelers not thinking about energy improvements, but energy-efficiency upgrades are one of the only things that begin to pay back right away for homeowners who live in hot or cold climates,” she notes. “With more remodeling than new construction happening in the country right now, there are great opportunities to help educate existing homeowners about energy savings.”
Homes account for nearly 25 percent of U.S. energy use, equating to more than $250 billion annually. Asch believes just getting homeowners to recognize how much energy they use and the associated costs would be a major step in the right direction.
For the past 70 years, federal mortgage programs, which currently guarantee 90 percent of all loans, have used the same basic determining factors in underwriting a borrower’s debt-to-income ratio. The tally includes principal, interest, property taxes and homeowner’s insurance, but in recent years energy costs have outstripped taxes and insurance. According to a SAVE Act legislative fact sheet, in 2007-08, the average U.S. homeowner spent $2,340 on energy, $1,897 on property taxes and $822 on homeowner’s insurance.
To help account for this significant expense, the SAVE Act would require the Washington-based U.S. Department of Housing and Urban Development to update federal underwriting and appraisal guidelines to consider estimated annual energy costs in the debt-to-income ratio of a home being sold. The assessment of these costs may be provided by the buyer or seller in an energy-efficiency report of the property conducted by a qualified energy-performance company. If no report is provided, the lender will use a default calculation based on the home’s square footage and the most current version of DOE’s Residential Energy Consumption Survey database.
Another component of the SAVE Act looks at energy as a value consideration in the loan-to-value ratio. In this case, homeowners can choose to submit an energy report to the lender to demonstrate the relative efficiency of their home. The lender will then use the estimated energy costs from the report in place of the default energy-cost calculation and add the net present value of energy savings to the appraised value of the home to calculate the loan-to-value ratio. The legislation does not require an energy inspection for all homes. If no energy-efficiency report is provided, the lender will not add any value for expected energy savings, but for homes that have energy-efficiency features, the process can work to benefit the seller and buyer.
For example, the buyer of a residence that is 30 percent more efficient than a standard home could expect annual utility bill savings of $650 (or about $50 per month). Under the new underwriting guidelines, these expected savings would be applied to the borrower’s maximum loan limit, allowing the homeowner to qualify for a larger mortgage to cover the incremental cost of efficiency improvements. The monthly energy savings should more than offset any increase in the mortgage payment, resulting in a lower net payment each month.
“The SAVE Act applies to any and all efficiency measures: heating and cooling systems, insulation, air-infiltration prevention and high-performance windows,” Bergtold notes. “If the act passes, it will become a demand mechanism for the market that can have an enormous impact on remodelers.”
Asch agrees: “Remodelers are already in the house and they know how to upsell. The act acknowledges that energy-efficient measures add value to the home at the time of resell, but that’s only one benefit. They also improve the residents’ comfort and lower energy bills. All these assets help remodelers put a premium on what they’re offering.”
Remodelers can subcontract the work or learn to do it themselves. Cooke asserts that the more remodelers know about energy-efficiency measures, the more they will be able to help their clients make better choices. Getting informed can begin with the Washington-based U.S. Environmental Protection Agency’s free webinars; trainings through third-party programs geared toward energy efficiency in new construction; or conferences, which not only educate but inspire. Asch and Cooke caution that remodelers should learn about the whole-house approach before jumping in, however.
“It’s incredibly important that remodelers look at a house as a holistic building system to make sure it performs well, is healthy to live in and offers long-term advantages,” Cooke says. “When contractors focus on only a part of the process, they can end up implementing measures that work against each other or compromise indoor air quality or durability.”
Other reported benefits of the SAVE Act include enhancing the nation’s energy security. By promoting greater energy efficiency for homes, which are the nation’s largest single consumer of electricity, the act would lower our dependence on foreign oil and reduce the need for new power plants to meet an ever-increasing demand for power in the U.S.
Proponents of the act also believe making mortgage underwriting more accurately reflect the real-life costs of homeownership will protect the nation from another foreclosure crisis because federal mortgage programs will be able to produce better loans, more accurate appraisals and more stable borrowers.
The SAVE Act is likely to be introduced during the current session of Congress. If it is adopted, agencies would have two years to update their mortgage underwriting systems. All federally insured or purchased mortgages would have to comply with the legislation’s terms three years after the date of enactment.