Mortgage formulas may include energy
WASHINGTON — The big three mortgage players — Fannie Mae, Freddie Mac and the Federal Housing Administration, who together account for more than 90 percent of all loan volume — typically don't consider energy costs in underwriting. Yet utility bills can be larger annual cash drains than property taxes or insurance — key items in standard underwriting — and can seriously affect a family's ability to afford a house.
A bipartisan effort on Capitol Hill could change all this dramatically and for the first time put energy costs and savings into standard mortgage underwriting equations. A bill introduced Oct. 20 would force the big three mortgage agencies to take account of energy costs in every loan they insure, guarantee or buy. It would also require them to instruct appraisers to adjust their valuations upward when accurate data on energy efficiency savings are available.
Titled the SAVE Act (Sensible Accounting to Value Energy), the bill is jointly sponsored by Sens. Michael Bennet, a Democrat from Colorado, and Johnny Isakson, a Republican from Georgia. Along with the traditional principal, interest, taxes and insurance calculations, estimated energy expenses for the house would be included as a mandatory underwriting factor.
For most houses that have not undergone independent energy audits, loan officers would be required to pull data from either previous utility bills — in the case of refinancings — or from a Department of Energy survey database to arrive at an estimated cost. This would then be factored into the debt-to-income ratios that lenders already use to determine whether a borrower can afford the monthly costs of the mortgage. Allowable ratios would likely be adjusted to account for the new energy/utilities component.
For houses with significant energy-efficiency improvements already built in and documented with a professional audit such as a home energy rating system study, lenders would instruct appraisers to calculate the present net value of monthly energy savings and adjust the final appraised value accordingly. This higher valuation, in turn, could be used to justify a higher mortgage amount.
But you might ask: In a fractious, polarized Congress, could this bill actually make it through this session? The co-sponsors are optimistic, and supporting groups say there is substantial bipartisan support for the idea in both the House and Senate.
For homeowners who think that their energy-efficiency improvements should be worth something, there is no rule barring you from asking a qualified appraiser or a lender to assess the added market value of those features. You can get your house rated and documented. Or you can invest in documented improvements that save on utility expenses and hope that the federal agencies see the light and change their underwriting and valuation procedures before you go to sell.
Kenneth R. Harney can be reached at email@example.com.