By Johnny Ritzo
Jason Payne
At the ACI National Conference in Baltimore, MD, last week, I sat down with Jason Payne and picked his brain about Energy Efficient Mortgages (EEMs). Jason founded EEM Training and has been instrumental in promoting EEMs to lenders, appraisers, real estate agents and energy efficiency professionals.
You may have read my last post about the Save Act, which would require federal lending agencies to factor in energy costs during the underwriting process for home mortgage loans. EEMs achieve a similar result, just without the legislative mandate.
So, what are EEMs?
Much like a traditional mortgage loan, an EEM may be used to purchase a home or to refinance an existing home. EEMs differ from traditional mortgage loans in that you can receive funds above and beyond what you would normally qualify for, so long as the additional money received is spent on energy efficiency–either purchasing retrofit upgrades or buying an efficient home over an energy hog.
Even though your mortgage payment goes up, since you’ve increased the loan principal, your total monthly out-of-pocket expenses decrease. So, as long as the monthly energy savings are greater than the increase in mortgage payments, both the homeowner and lender win.
Example of how EEMs work.
Assume you’ve budgeted $1500 per month to put towards a mortgage and purchasing energy. You’ve got two options:
- Option 1: Stay the course and pay $1250 for your mortgage and $250 for energy bills; or
- Option 2: Refinance and tack on $10,000 that gets folded back into the mortgage. Your monthly mortgage payment goes up to $1350 but your utility bills fall to $125, resulting in a $1475 monthly expenditure.
Option 2 is the better course of action, since you’re paying less per month and getting a better house (i.e. one that is more efficient, has better air quality, is more comfortable, etc.).
This example assumes that you can refinance at the same or a lower interest rate then you’re currently paying. For the next few years, though, interest rates will likely remain low, so there’s a decent chance of this example coming to fruition.
Qualifying for an EEM.
The good news is that your income doesn’t factor into qualifying for the additional funds that will go towards energy efficiency improvements. Of course, you’ll still need to meet the debt-to-income ratio for the standard mortgage loan, but not for the dollars allocated to achieving energy efficiency. This is because your ability to repay the additional principal and interest comes from the predicted energy savings, not from your income.
Although income won’t hold you back in getting an EEM, there are several steps to follow:
- Find a lender that offers EEMs, which can be difficult;
- Qualify for a standard mortgage (or refinance);
- Find a Home Energy Rating System Rater (HERS Rater) experienced with EEMs;
- The HERS Rater performs an energy audit on the home and calculates a cost-effective energy package (meaning the cost of installing the energy package is less than the present value of the savings of the useful life of the energy improvement);
- The HERS Rater writes a report acceptable to the U.S. Department of Housing and Urban Development (HUD) that will be used in the underwriting process.
If the lender is satisfied that the energy savings will exceed the increase in mortgage payments, the loan should be granted.
What’s the response from lenders?
Energy typically represents the second largest carrying cost for homeowners, and private lenders are beginning to see an opportunity here. A homeowner who purchases less energy has more income to allocate to other expenses, like a mortgage. This means lenders can get a larger slice of a homeowner’s income without taking on greater risk. Additionally, EEMs represent a way for a lending institution to differentiate themselves in a crowded market. Who wouldn’t want to work with a lender who can get you into a better house for less money? Thus, we’re seeing some lenders enter the EEM market, but they are few and far between at this point.
For those that do offer EEMs, a sticking point has been mortgage brokers and sales agents who work on commission. They don’t want to hold up closing, even for a week. Getting an energy audit, calculating savings, and preparing the report for the lender can take the HERS Rater a few weeks. For the agent, this delay is not justified by the marginal increase in loan principal, and, thus, his/her commission. A key step for the growth of the EEM market, then, is for lenders to develop a better incentive structure for the sales agents and brokers. But, the looming question remains: Is there enough profit in the EEM for both the lender and the sales agent to justify the delay?
Jason Payne is currently building a website that will list lenders, appraisers, HERS Raters and real estate agents who work with EEMs. You’ll be able to search a directory and find a knowledgeable EEM team in your area. Be sure to check out www.eempartners.com in the near future.
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