An energy efficient home can make the difference between foreclosure and maintaining mortgage payments, according to a new report.

The March 19 anaysis, Home Energy Efficiency and Mortgage Risks, produced by the Chapel Hill Center for Community Capital at the University of North Carolina and the Washington, D.C.-based energy conservation advocate Institute for Market Transformation (IMT), is the first academic study to investigate the connection between energy efficiency and the ability to repay a mortgage. The risk of mortgage default is one-third lower for energy-efficient, Energy-Star rated homes, according to a March 19 statement accompanying the report.

“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” Cliff Majersik, executive director of IMT, said in the statement. “We long believed this to be the case, and now this study proves it. Successful housing market reforms will require reconsidering the risk factors in mortgage default, including energy costs.”

Robert Sahadi, director of energy efficiency finance policy at IMT, told BNA March 27 that the study provided a response to people in the mortgage industry, who were saying “show me.”

Asked if energy savings are really enough to keep a homeowner solvent, Sahadi said yes. Estimating a monthly savings of $250 for someone with an income of $4,000 a month, he said it doesn't appear to be a great deal of money. But after factoring in the household financial obligations, “that $250 as a percent of what is left could be 25 to 50 percent for a more moderate income borrower,” he said.

Brown Homes Losing Share to Green?

Energy efficiency has become a high priority among consumers. According to a late February National Association of Home Builders study, 90 percent of home buyers would select a home with energy efficient features, and even pay another 2 to 3 percent of costs, to permanently lower their utility bills.

“The $4 a gallon for gasoline, I think, [has] made people conscious of energy costs,” Sahadi said. “Younger people are starting to look at this.”

Another aspect of the study that might be equally important, Sahadi said, is that people who live in energy efficient homes are staying in them longer. “The thought here is that people that are buying energy efficient homes are looking at a longer time horizon in their home.” Therefore, they are looking more carefully at the cost of maintaining that home, he said.

Sahadi said equipping new homes with energy saving features is the easier proposition, and almost 40 percent of new construction is already related to energy efficiency. Financially, it represents an approximate 3 percent to 5 percent price bump, Sahadi said.

On the retrofit side, he said, the job creation benefits would be significant. People would be hired to replace the furnace, attic insulation, and quite possibly the windows. “We did an analysis about 18 months ago that showed that even extremely modest increases in the amount of people that would do this for existing homes led to significant employment gains, on the order of 60,000 to 70,000 jobs a year,” he said.

Best Practice

It is the hope of the IMT that energy efficiency will be part of a mortgage underwriter's best practice, but that is largely a matter of finding agreement with the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac. “Right now the lending industry is pretty much a function of GSEs,” Sahadi said. “Ninety-five percent of all single family is going through those agencies, and they are pretty much doing whatever the agency guidelines suggest. So at this point we really have to get those agency guidelines to incorporate energy efficiency.”

The residential sector accounts for 20 percent of what Americans spend annually—estimated to be $230 billion—on non-transport related energy, according to the report. Better energy practices could save up to $41 billion annually, according to research by global management consulting firm McKinsey & Company.

The study advocated factoring this information in as standard practice for lenders when home mortgages are under consideration, and for lawmakers discussing policy.

“We have something called the SAVE Act,” Sahadi said. The bill, S. 1737, which advocated legislation to improve the accuracy of mortgage underwriting by factoring in energy costs, was introduced to the 112th Congress on Oct. 19, 2011, by Sens. Michael Bennet (D-Colo.) and Johnny Isakson (R-Ga.), and referred to the Committee on Banking, Housing, and Urban Affairs. It called for the inclusion of energy efficiency into federally guaranteed mortgage underwriting. “It just sort of died on the vine,” Sahadi said. “It will be hopefully reintroduced in this Congress soon.”

Cost is the Biggest Obstacle

The biggest obstacle to creating more energy efficient homes, Sahadi said, has been the cost to homeowners. Generally, he said, those earning a middle income and above find the resources, but those below that have a hard time under the current conditions. “Even middle income buyers in high-cost areas?…?are hard-pressed to come up with even that extra 3 to 5 percent,” he said. “The other factor is, this debt-to-income ratio is a key underwriting variable. So, to the extent you pay that little more, your debt-to-income goes up and that starts to work against you in the underwriting analysis.” What advocates would argue, he said, is that debt-to-income ratio should be adjusted for the energy savings. “You have your same debt load, but on the other hand?…?your energy bill, which is not included in the debt-to-income ratios, is $200 to $250 less. And that should be factored in.”

Asked about the impact if energy efficiency becomes a real estate and underwriting best practice, Sahadi said, “The household consumes a good percent[age] of our domestic energy, something like 20 to 25 percent of it. So if you could bring that number down?…? then we will be making our existing housing stock better.”

“We'll be?…?less dependent on foreign energy sources,” Sahadi said. “Hopefully, we are more in a realistic mode. We can't be building highways out to forever and we can't be building all this infrastructure. We can't be the disposable nation that we have historically been.”

from Bloomberg.com By Kevin Lambert Apr 2, 2013 8:24 AM MT

There was a terrific piece in the Wall Street Journal this week outlining how companies like Solar City take advantage of federal tax incentives to purchase cheap solar materials from China and benefit Wall Street financial firms.  This is a must read for anyone that is considering a solar lease.  Washington and the consumer gets screwed, domestic solar manufactures get screwed, Wall Street makes a mint.  Sound familiar?

Subsidizing Wall Street to Buy Chinese Solar Panels by TJ Rodgers

At the end of the recently released film "Margin Call," the chairman of the fictional investment bank that triggered the mortgage-backed securities meltdown sits in his executive dining room, looking down on the Hudson River sunset while enjoying a steak and an expensive bottle of Bordeaux. Why not? He has just saved billions for his shareholders by dumping the firm's entire "toxic loan" portfolio in one hectic trading day. Just before giving a bonus to the brilliant analyst who foresaw the meltdown only hours in advance, the chairman predicts, "There's going to be a lot of money made coming out of this mess."

Wall Street understands how to make money, up-market or down. "Margin Call" may fuel Occupy movement ire, but in creating mortgage-backed securities, Wall Street did nothing other than facilitate home-financing access to the next tier of less-qualified home buyers, as demanded by every president since Bill Clinton. After that, the bankers did exactly what their shareholders wanted: bundle those risky loans into securities, sell them to lock in the profits, and dump the risk right back onto the federal government—where it belonged.

My purpose is not to debate the morality of mortgage-backed securities but to update the Law of Unintended Consequences with the corollary Law of Misguided Subsidies: Whenever Washington disrupts a market by dumping subsidies into it, Wall Street will find a way to pocket a majority of the money while the intended subsidy beneficiaries are harmed by the resulting market turmoil.

The recent crash in mortgage-backed securities was a near-repeat of the savings-and-loan crash of the 1980s, in which Washington insured the S&L industry but failed to set limits on high-risk loans. When the bubble burst, Washington paid Wall Street the insurance money while homeowners lost huge sums in real-estate hell. Wall Street understands how to manage risk; the federal government and consumers do not.

Consider the current 30% federal solar energy subsidy. A home solar system with 60 solar panels produces about 15,000 watts of power, enough to completely offset the $6,000 annual electricity bill of a typical upscale California home. The system costs about $90,000 prior to the 30% federal income-tax credit, which reduces its cost to $63,000. After a simple payback period of about 10 years, the homeowner literally enjoys free electricity for the remainder of the guaranteed 20-year system life, a very profitable 10 years.

But what if that $27,000 tax credit, the accelerated-depreciation tax savings, and most of the hefty post-payback profits went to Wall Street firms with a "tax appetite," not the homeowner? That's just what happens with the majority of new home solar-system installations today.

Washington and consumers are both notoriously shortsighted investors. Washington thinks in two-year election cycles, and consumers will usually choose a financially unfavorable option if it offers no money down. Today's most successful pitch for home solar financing goes like this: "Why pay a lot of money when you can get your solar system installed free and immediately reduce your utility bill?" Most homeowners find that proposition compelling. They ignore the fine print: "You must give your tax credit and depreciation to us and sign a long-term contract to buy power from us at prices just below market."

Today, most new home solar systems are purchased by special Limited Liability Corporations (LLCs) that are specifically created by Wall Street firms to purchase home solar systems and to sell power to the homeowner on a cell-phone-like contract. The homeowner does not mind giving up the tax benefits as long as the "free" system reduces utility bills.

However, when the system is paid off and the monthly LLC profit jumps to 100% of the electricity bill, the LLC solar electricity price to the homeowner is maintained just below market—and the profit really begins to roll into the LLC. Since the risks to the LLC grow as the solar systems age, many banks offload their risk by selling the LLCs before their 20-year lifetime is up, locking in much of the long-term profit. There is now a growing market for what might be called "solar-backed securities." Wall Street understands the time-value of money; the federal government and consumers do not.

One of the largest solar-system installers in the U.S., SolarCity Corp., uses the LLC strategy and currently buys a majority of its solar panels from the low-cost Chinese supplier, Yingli. Thus when President Obama said that we must subsidize our solar industry to remain competitive with the Chinese, it would have been more accurate to say that we subsidize Wall Street to create employee-less corporations that buy and install Chinese solar panels in the U.S. Wall Street and consumers understand that free markets are borderless; Washington does not.

Just last week, the U.S. International Trade Commission found the Chinese solar industry guilty of "dumping" solar panels in the U.S. Tariffs are likely to be levied against Yingli and others. Here then, is a practical guide to the Obama administration's nonsensical solar policy: Washington gives tax breaks to Wall Street to fund LLCs that buy solar panels from the Chinese to "help" the American solar industry, while the ITC threatens to levy a tariff on those solar panels, which would raise the price of solar energy to U.S. homeowners. In short, Wall Street pockets the money and consumers get higher solar-energy prices.

We should stop reflexively indicting Wall Street "greed" and focus instead on Washington as the disruptive force in one market meltdown after another. Solyndra, the poster child of the Law of Misguided Subsidies, borders on irrelevancy compared to the full impact of bad economic policy.