November 7, 2012

The Save Act was introduced to the Senate in October 2011 by Senators Bennet (D-CO) and Isakson (R-GA) and is now before the Senate Banking Committee.  This bill would promote residential energy efficiency by requiring federal lending agencies to consider a home’s heating and cooling costs when determining a home’s value as well as a buyer’s ability to repay the mortgage.   A home’s energy efficiency is determined by getting an energy audit or a home energy rating.

Impact on Underwriting Process

When purchasing a home with an FHA loan, a buyer must have a certain debt-to-income ratio, which measures one’s ability to make monthly mortgage payments in addition to other fixed expenses, such as insurance and taxes.  Historically, lenders haven’t considered energy costs when thinking about a mortgagee’s ability to repay a loan, so this would represent a fairly significant change to the underwriting process.The SAVE Act would also increase the allowable debt-to-equity ratio when purchasing an energy efficient home, since a greater portion of a buyer’s monthly income can go toward repaying the loan as opposed to purchasing energy.

Current homeowners will also be able to bundle the cost of energy efficiency upgrades into their home mortgages.  Under the SAVE Act, federal lenders will have to consider the net present value of home performance projects when calculating the loan-to-value ratio, another key metric that helps determine the loan amount.

Many Benefits

Proponents of the Save Act cite job creation (83,000 jobs over 5-7 years) and reducing dependence on foreign energy as primary benefits.  These would obviously be fantastic outcomes, but this bill is worth enacting simply for the benefits it bestows on homeowners, such as:

  • Nicer or less expensive homes. With less money going to the utilities each month, you can afford a more valuable home or simply repay your mortgage faster.
  • More comfortable homes.  Retrofit homes typically have less than a 2 degree temperature differential from room to room, so you can avoid having hot rooms and cold rooms.
  • Healthier homes. Generally, it’s preferable to control the quantity and quality of air entering your home through air sealing and mechanical ventilation, as opposed to filtering air through the old insulation and dead squirrels in your walls.
  • Greater financial security.  A 50% increase in the price of oil hurts less when you’ve reduced your energy consumption by 50%.

Sounds good, right?  What’s the holdup?

I recently attended a presentation held by the Leading Builders of America Association and the Institute for Market Transformation where the two primary criticisms against the bill were highlighted:

  1. Congress is nervous about touching anything involving the underwriting process given the fragile housing market.
  2. The recent recession has reignited the debates on federalism and Keynesian economics with groups like the Tea Party speaking out against governmental interference in markets.

These arguments should not stand in the way of the Save Act becoming law.  First, the bill would not inhibit the growth of the housing market, since homeowners will qualify for more money when purchasing efficient homes.  Remember, federal lending agencies will be instructed to raise the debt-to-equity ratio for loans used to purchase efficient homes.

With regard to the Washington intermingling with markets, it’s already happened.  Federal agencies are the only game in town, guaranteeing over 90% of all new residential loans.  So, if we’re going to address efficiency through the underwriting process, which seems to make sense, we have to look to the Federal Government before turning to the private market.