Sensible Accounting to Value Energy: The SAVE Act
Supporting Energy Efficiency Through More
Accurate Mortgage Underwriting and Appraisal
Accounting for Energy Efficiency
An energy-efficient home can save a homeowner hundreds of dollars a year in lower utility bills while improving comfort and helping the environment. Many homeowners are more than willing to pay the small up-front cost, and they could afford to pay it out of their energy savings. But current federal mortgage underwriting and appraisal rules do not recognize the real value of energy efficiency, and thus mortgages often cannot cover the initial cost. The Sensible Accounting to Value Energy (SAVE Act) seeks to fix this by including the energy efficiency of homes in calculations used to determine mortgage eligibility.
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The SAVE Act would spur millions of dollars in investment in energy efficiency with no new government mandate and no subsidy, simply by fixing current banking rules that create an artificial barrier. The bill would:
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SAVE Act
The Sensible Accounting to Value Energy (SAVE) Act would direct the Department of Housing and Urban Development (HUD) to update its underwriting and appraisal guidelines to ensure that any home loan backed by Fannie Mae, Freddie Mac, the FHA, or other federal agencies and entities would account for the home’s energy costs. As Fannie Mae and Freddie Mac guarantee around 90% of home mortgages in the United States, any such regulatory change would likely be adopted as standard practice by most domestic residential mortgage lenders. The home efficiency could be established by a Home Energy Rating System (HERS) rating or other approved, independent efficiency rating. If no such rating is available, the energy use would be estimated from home size and average regional costs.
Home Value Cap (Loan-to-Value Adjustment)
Conventional home appraisals do not normally account for the energy efficiency of a home or the added value of energy efficiency improvements. Although better insulation or a high-efficiency heating and air conditioning system is likely to reduce the energy costs for a home buyer, and studies show buyers recognize this value, under the current system independent appraisers generally have no way of fairly valuing efficiency and every incentive to make a quick appraisal rather than an in-depth examination.
Mortgage amounts are capped at a set percentage of the appraised home value (“loan-to-value ratio”), often 80%. The SAVE Act would adjust the home value used to cap the mortgage (or, in theory, any property lien based loan). As long as the appraiser did not already consider energy efficiency, it would add the present value of projected energy savings compared to a typical home (that is, the value of future savings would be discounted based on the mortgage interest rate) to the appraised value when calculating how much of a loan would be allowed relative to the value of a home. For a home that uses 30% less energy than an average home, the added value would be over $10,000.
Affordability Cap (Debt-to-Income Adjustment)
Mortgage underwriting also fails to account for the reduced utility costs in an energy-efficient home. Yet a home buyer moving into an efficient home with low energy bills will have a greater ability to make mortgage payments than one moving into an inefficient home. While estimated property tax and insurance costs are factored into lenders’ determination of what potential home buyers can afford in a mortgage, utility costs are not. Besides more accurately valuing, and thus enabling, energy efficiency upgrades, directly including energy costs may reduce foreclosures by ensuring buyers can afford very large homes with high expected utility costs.
When calculating how much of a mortgage a home buyer may be eligible for, lenders add together principal of the mortgage, interest on the mortgage, property taxes, and insurance costs (PITI, or Principal, Interest, Taxes, and Insurance); they may also include condo fees, homeowners’ association fees, and the like as appropriate. These housing costs are compared to income in the “debt-to-income” ratio. The formula does not, however, account for home energy costs, which on average are the second largest expense of owning a home, larger than either property taxes or homeowners’ insurance. The SAVE Act would add energy costs to this calculation (adjusting the allowable ratio accordingly), based on a qualified energy rating of the home or average costs. For a home that uses 30% less energy than average, costs would be reduced by more than $700 per year.
The Legislation
The SAVE Act, S. 1737, was introduced on October 17th, 2011 by Senators Bennet (D-Co.) and Isakson (R-Ga.) and referred to the Committee on Banking, Housing, and Urban Affairs. Comparable legislation has not yet been introduced in the House of Representatives. Thus far, the proposal has enjoyed support from a very broad range of organizations, including the U.S. Chamber of Commerce, the Appraisal Institute, the U.S. Green Building Council, and the Natural Resources Defense Council.
