The Sensible Accounting to Value Energy (SAVE) Act: A Section-by-Section Summary

The SAVE Act, S. 1737, was introduced on October 19, 2011 by Senators Bennet (D-Co.) and Isakson (R-Ga.). It seeks to incorporate energy efficiency into appraisal and mortgage guidelines so as to ensure appropriate valuation of energy costs and energy efficiency improvements in the mortgage process. While the act deals directly with Federal agencies involved in mortgages (e.g. Fannie Mae and Freddie Mac), because Fannie Mae and Freddie Mac guarantee around 90% of home mortgages in the U.S., changes to their standards would likely be applied to the vast majority of new home mortgages, including refinancings.

• Alliance factsheet (pdf)
• Bill text from the GPO (pdf)

Section 1: Short Title

This section establishes the act’s title.

Section 2: Definitions

This section lays out various definitions of key terms, with some reference to existing financial regulations. Of note, mortgagee includes servicers of mortgage loans as well as subsequent purchasers and transferees of mortgages on secondary markets. Defining Secretary in this bill as the Secretary of Housing and Urban Development directs the Department of Housing and Urban Development (HUD) to write the necessary regulations. The definition of covered agency, to which the requirements of most of the rest of the act are directed, covers any Federal agency or enterprise* (relevant mostly only to those which are involved in mortgage lending or mortgage markets, e.g. Fannie Mae, Freddie Mac, HUD, and Veterans Affairs).

Section 3: Findings and Purposes

This section sets forth a number of findings, including noting that energy costs can be a large part of household expenditures, that such expenditures can vary greatly by home, and that energy costs can have an important impact on a home’s value. It also notes the lack of accounting for energy costs in debt to income and loan to value calculations.

The purposes of this act would direct relevant Federal agencies to:

• Improve mortgage underwriting under Federal mortgage agencies by including energy costs, thus encouraging energy efficiency improvements to homes and creating jobs;
• Include energy costs in calculations of mortgage eligibility;
• Include energy savings with appraised home values to reflect the value put on energy efficiency by home buyers; and
• Adjust permitted debt to account for energy costs.

Section 4: Enhanced Energy Efficiency Underwriting Criteria

This section would direct HUD to develop guidelines for the implementation of home loan eligibility requirements that account for the expected energy costs of a property. Such requirements would ensure that estimated energy costs would be considered when determining whether or not a loan applicant had sufficient income to be able to repay the loan. Where an agency has debt-to-income tests for applicants, energy costs (to include electricity, natural gas, oil, and other fuel used on the property) would have to be included in such tests.

A valid energy efficiency report, for use in these calculations, would have to estimate expected energy costs of that specific property, based on a rating from the Residential Energy Service Network’s Home Energy Rating System (RESNET’s HERS) or other third-party method approved by HUD in consultation with the Department of Energy (DOE). The report would be made available as practicable to the loan applicant and be included in documentation for the loan.

If no energy efficiency report is available, average expected energy costs for a home of that type in that region would be calculated based on the most recent version of the Energy Information Administration’s (EIA) Residential Energy Consumption Survey (RECS) or other sources approved by HUD.

The changes to the underwriting criteria could not be negated by additional loan requirements.

These requirements would have to be implemented within three years of enactment and in any case before 2015. They would have to apply to any relevant loan for purchase or refinancing of real property (including condos and co-ops), and sufficient guidance would have to be available.

Section 5: Enhanced Energy Efficiency Underwriting Valuation Guidelines

This section would direct HUD, along with the Federal Financial Institutions Examination Council, to develop guidelines for how to determine maximum loan amounts based on the value of properties for those properties that have energy efficiency reports. In consultation with DOE, HUD would issue regulations on how to determine estimated energy savings based on the efficiency reports.

These guidelines would require that an energy efficiency report provided to the mortgagee be used by the mortgagee or agency to determine energy savings. The present value of the estimated energy savings would be added to the appraised value of the property when determining loan-to-value ratios of the property if the value of the energy efficiency is not included in the appraisal. Methods for doing so would be established by HUD.

Energy savings would be calculated relative to an average comparable house, according to rules set by HUD. They would  account for the estimated life of the applicable equipment as directed by HERS or another system approved by HUD. And they would be discounted annually using the average interest rate for 30-year mortgages.

Several adjustments would be made to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to better enable appraisers to consider the energy efficiency of a home. Appraisals that use an energy efficiency report would need to be done by state certified appraisers, who meet higher qualification requirements. Lenders would be required to grant state certified appraisers timely access to information about a property’s energy and water conservation features, including ratings.

Regulations would include any necessary limitations to protect against double counting of efficiency improvements and under- or over-valuation of improvements. After seven years, HUD could alter regulations, or add additional exceptions, to better reflect actual market values for properties’ energy efficiency.

Section 6: Monitoring

Within one year of implementation of these requirements, and then every year afterwards, each relevant Federal agency would report on the number of loans that included energy efficiency adjustments.

Section 7: Rulemaking

HUD would establish the regulations needed to carry out this act in consultation with DOE, state energy offices, and relevant stakeholders.

Section 8: Additional Study

Within 18 months of enactment, HUD would establish an advisory group to report and comment on implementation of these underwriting criteria. They could suggest revisions or additions, which could include the addition of location-based transportation costs and water costs as factors in the underwriting.