Bipartisan bill would reward energy efficiency in home loans

You’ve found your dream home, crunched the numbers and decided you can swing the monthly payments. The only problem is that your debt-to-income ratio is a shade too high to comply with new mortgage lending rules that went into effect in January with the federal Dodd-Frank Act.

If that home you covet is more energy efficient than most, you might be in luck if the SAVE Act is passed.

Co-sponsored by Sen. Michael Bennet, D-Colo., the bill requires lenders to take into account energy cost savings of a particular home when considering a loan applicant’s eligibility for federally backed mortgages – about 90 percent of all new home loans.

Despite a wide coalition of supporters ranging from the National Association of Homebuilders to the Natural Resources Defense Council, some question how much positive impact the legislation will have and whether it might entangle the loan application process further.

Bennet and Sen. Johnny Isakson, R-Ga., reintroduced the Sensible Accounting to Value Energy Act last summer after it failed in the previous session of Congress. Last month, the SAVE Act was included as part of a larger energy bill introduced by Sens. Jeanne Shaheen, D-N.H., and Rob Portman, R-Ohio, that could see a vote later this year.

The SAVE Act would update underwriting and appraisal guidelines for borrowers who submit a home energy report when applying for a loan.

The bill has three main components:

• If an energy report shows that a home has lower monthly energy costs than the average home in the area, the lender would be required to consider that savings an offset to the borrower’s other monthly expenses when calculating the person’s debt-to-income ratio.

• The bill requires lenders to consider the value of energy savings in calculating the loan-to-value ratio if not accounted for in the home appraisal.

• Finally, the bill requires that lenders inform loan applicants who do not submit a home energy report of the benefits of energy efficiency and how they can upgrade their homes.

“We think this is a fairly modest tweak in the existing regulatory code that can unleash huge economic benefits,´ said Sean Babington, senior policy adviser in Bennet’s office.

Bennet’s office provided numbers from the U.S. Energy Information Administration that indicate that the average American household spends about $2,500 in annual energy costs. Cut those in half in a home with efficient appliances, windows, insulation and the like, and it amounts to a savings of a little more than $100 per month. Put toward a 30-year mortgage with a fixed rate of 4.375 percent, that extra cash could equate to about $20,000 in extra buying power as it relates to purchase price.

Homebuilders herald the legislation, saying they are required by code in many areas to include energy-efficiency upgrades. Those upgrades, they say, aren’t always accounted for when a person is deciding between purchasing a new home versus an older one that might be less expensive but also less efficient.

While sustainability has boomed in popularity in recent years, particularly in areas along the Front Range such as Boulder County, David Ware, president and chief executive of Denver-based McStain Neighborhoods, said there is still limited recognition by the lending industry about the impact energy-efficiency upgrades can have.

“The energy efficiency we bring to the table today can significantly reduce those costs upward of half or maybe 75 percent compared with a home built 20 years ago,” Ware said.

Michael Markel, president of Boulder-based Markel Homes, said passage of the SAVE Act probably wouldn’t affect the efficiency aspects built into his company’s homes because they already far exceed what’s required by code. However, he added, the legislation could make Markel homes more affordable to a wider range of people given that energy-efficiency upgrades generally come with added upfront cost.

“If there’s a cost in that, there should be a benefit to the buyer” in the form of easier loan qualification, Markel said.

Other supporters of the bill say increased economic activity would be reaped by contractors and other businesses in the clean-energy industry, of which there are many in Colorado.

Previous iterations of the SAVE Act stalled largely because the new structure would have applied to all home loans, whether a home report was supplied or not. That caused many to fear that older homes would be branded with a “scarlet letter” of inefficiency and be tougher to finance. The bill in its current form makes the home reports voluntary. If a borrower doesn’t have one completed, the lender doesn’t factor efficiency of a home into the debt-to-income calculations.

But the bill does have its skeptics.

Lenders still are dealing with the increased regulations and processes imposed by Dodd-Frank, the most notable being a 43 percent cap on the allowable debt-to-income ratio. Many also question whether another layer of regulation in the process is a good thing.

Mark Bower, executive vice president at Home State Bank in Loveland and treasurer of the Colorado Bankers Association, said having the government dictate how to underwrite loans hurts consumers in the long run. He added that he’s not sure how much benefit actually will be provided to someone who is on the cusp of the debt-to-income ratio ceiling, particularly given some of the unknowns.

One variable of the SAVE Act is how the baseline for comparison will be set as it relates to average home energy costs. If the bill passes, the Department of Housing and Urban Development will write guidelines for determining how that baseline is calculated.

Jay Champion, chief lending and member services officer at Boulder-based Elevations Credit Union, said Elevations absolutely is a proponent of energy-efficiency financing. But he questions whether the SAVE Act is necessary given programs already in the marketplace such as rebates from energy companies for financing energy-efficiency upgrades. Elevations partners with Boulder and Denver counties on loan programs to finance such upgrades, although not through mortgages.

Adding regulations to the mortgage process, Champion said, generally only increases the cost and time involved in acquiring financing.

“I think the intent is good,” Champion said of the SAVE Act. “We just want to make sure any regulations that are enacted are done in a way that keeps consumer access and costs in time and money reasonable.”

Still, Ken Hotard, senior vice president of the Boulder Area Realtor Association, said worries about added regulation overlook the “significant benefit” to consumers in the wake of tighter lending restrictions.

“I think Dodd-Frank begs for something like this,” Hotard said. “This is designed to open that door up a little bit for prospective homeowners in securing a mortgage and taking into account real cost savings.”

Joshua Lindenstein can be reached at 303-630-1943 or jlindenstein@bcbr.com. Follow him on Twitter at @JoshLindenstein.

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