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Real Utility: Accounting for Energy Costs Makes Mortgage Sense

Backers of a move to add utility bills into home-loan considerations say it will boost energy conservation and create lots of jobs that can't be exported.
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Mortgage underwriters generally weigh several numbers when deciding whether a family can afford a new home. They look at income, of course, and tally up expenses in the form of a home’s property taxes, insurance premiums and monthly payments. There is one number they ignore: how much a household spends on its utilities, a figure that averages more than $2,000 a year in the U.S.

In fact, most U.S. families spend more powering, heating, and cooling their homes than they pay in real estate taxes and insurance. At the margins, that number can spell the difference between a home a family can reasonably afford and one it has no business buying. But Fannie Mae, Freddie Mac, and the Federal Housing Administration, which by setting standards for the huge numbers of loans they buy essentially set the rules for American mortgages, don't take energy costs into account.

This week, Democratic Sen. Michael Bennet and Republican colleague Johnny Isakson introduced  the SAVE Act, a bill that would require them to do so. And for this seemingly small-sounding idea, a large coalition has formed around the promise that this one change could aid homeowners, encourage energy conservation, and create thousands of new jobs.

“Part of the reason this particular idea might have some legs and why you’re seeing it now is because of the financial climate that we’re in,” said Ross Eisenberg, the environment and energy counsel for the U.S. Chamber of Commerce. Other government grant programs and tax rebates have tried to encourage homeowners to retrofit their homes to make them more energy efficient.

“A lot of those funding mechanisms out there are now coming to a close,” he said. “And given the fiscal constraints of Congress we’re dealing with, and a lot of the political divides over what to do about that, nothing with a billion-dollar price tag that promotes this kind of stuff seems like it would get the backing you would hope for to get through Congress. That’s why this one is working.”

Also on board are the Natural Resources Defense Council, the Institute for Market Transformation, and much of the homebuilding industry. The American Council for an Energy-Efficient Economy has projected that the bill would create 83,000 jobs and $1.1 billionon homeowner energy savings by 2020.

Homebuilders are behind the idea because it will prompt homebuyers to pursue more energy-efficient houses, and because it will encourage people to make energy-efficient upgrades to their existing homes to boost their resale value.

THE IDEA LOBBYMiller-McCune's Washington correspondent Emily Badger follows the ideas informing, explaining and influencing government, from the local think tank circuit to academic research that shapes D.C. policy from afar.

Miller-McCune's Washington correspondent Emily Badger follows the ideas informing, explaining and influencing government, from the local think tank circuit to academic research that shapes D.C. policy from afar.

“But for that market to work rationally,” said Philip Henderson, a senior financial policy specialist with the NRDC, “the lender and the appraiser also have to account for those real savings.”

Currently, the federal mortgage agencies – which ultimately handle about 90 percent of all mortgages in the country – make no distinction in energy costs between a $300,000 compact urban row house and a $300,000 sprawling suburban ranch. Those two homes, though, may have widely different utility bills, and two families with the same income in both locations aren’t equally equipped to cover them. This means existing policy puts some people in homes they can’t afford, and underestimates the size of the mortgage that other people could readily handle.

“We’re not trying to predict with perfect certainty what families’ utilities are going to be,” Henderson said. “Rather, we want to enable the lender to get more accurate than the current method, which is very inaccurate.”

How would mortgage underwriters do this? Many loan applications come from people refinancing their homes, and lenders could look at their recent utility bills. New construction now frequently comes with an energy audit. And for the rest of homebuyers, Henderson says the automated formulas used by underwriting programs could consider the square footage of a home, or whether it has electric or gas heating. He expects that the methods would become more sophisticated over time.

The process shouldn’t make it harder for people to get a home loan, say the bill's backers, but it should make it harder for them to get a mortgage for a home that they couldn’t afford in the first place. And as a result of all this, the bill’s backers hope existing homeowners will also be spurred into making energy-efficient upgrades, because if mortgage underwriting includes the cost of energy bills, that makes energy-efficient homes more valuable.

“When people consider renovating their kitchen, they don’t ask, ‘What’s the payback period for cabinets?’” Henderson said, referring to how long it takes an item to pay for itself. “They know that better cabinets in a better kitchen are incorporated in the asset value of the home. It makes the home more valuable, and they get it back when they sell the home. Today that thinking [about energy efficiency] is suppressed by a mortgage process that’s flawed, and that needs to be corrected.”

Herein lies the job-creation element of the bill (and as government officials have said many times, insulation-installation jobs can’t be sent overseas). Eisenberg says this is just one of the reasons why the Chamber of Commerce got behind the idea. The chamber, he said, generally supports energy-efficiency policies, where the incentives don’t come at the expense of another industry.

“On something like this, not only is that goal reached, but you also have the job-creation aspect, which is a significant plus, and the lack of federal spending,” Eisenberg said. “It’s one good thing on top of another.”

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