EcoHome checks in with former mortgage banker David Porter, owner of PorterWorks, which offers a Green Specialist training program for appraisers, lenders, and insurance professionals nationwide.
First off, what are EEMs and EIMs?
These are loans that credit a home’s energy efficiency in the mortgage itself, giving borrowers the opportunity to finance cost-effective, energy-saving measures as part of a single mortgage. They allow borrowers to stretch their debt-to-income qualifying ratio in order to qualify for a larger loan amount and a better, more energy-efficient home.
An energy efficient mortgage (EEM) is typically used to purchase a new home that is already verified by a third party as energy efficient, such as an Energy Star-qualified home. An energy audit, performed by a certified energy rater, is required to prove efficiency and report expected monthly savings.
Energy improvement mortgages (EIMs) are for existing homes that need an energy retrofit. An energy audit identifies items that will make the home more energy efficient, and the costs of these improvements are added to the mortgage loan. EIMs are available for either a purchase or refinance of an existing home.
EEM and EIM guidelines are different depending upon the type of loan, so be sure the lender you are working with understands the details. FHA, VA, Fannie Mae, and Freddie Mac all have EEM and EIM programs.
Are these mortgages popular with lenders?
The market for these types of mortgages should be very popular considering the fact that out of 128 million existing homes in this country, 95 million need some type of energy retrofit. The average American home is about 35 years old. Insulation wasn’t required until the mid '70s. Energy efficiency wasn’t really considered until the 1990s. Look at all these homes that need energy retrofits and then look at all the refinances we’ve had recently: How many of the owners of those homes were offered an EIM? Not many, and getting an accurate count has been near impossible. It’s a crime.
These programs are not new; they have been around very a long time, 15 to 20 years. Lenders are not offering them because they don’t know enough about them and they don’t think they are necessary. They are not required to even discuss them.
Do lenders take a home’s energy efficiency into account when qualifying a borrower?
No, not at all. Lenders do not look at a home’s utility bill. When you go to buy a house, the lender will consider your income, debt, and your projected house payment and then tell you what you qualify for. They add in taxes and hazard insurance, but they don’t look at energy costs, which can be nearly as much or more than taxes and insurance combined. According to a study done in part by the Institute of Market Transformation, typical annual home expenses include $822 for hazard insurance, $1,897 for real estate taxes, and $2,340 in energy costs.
Lenders really need to start looking at what I call PITIUM (Principal, Interest, Taxes, Utilities, and Maintenance).Whether you buy a 2010 Energy Star home or a 1968 energy-bleeding home, the lender looks at you the same way. I think that is inherently dangerous.
What is wrong with the way houses currently are appraised?
The Holy Grail for appraisers and lenders is “comparable sales” even though they don’t weigh the costs to build the home. The market is not always the best indicator of the value of a home, of what it cost to build. Perhaps comparable sales valuation approach should be tempered with cost considerations.
What can builders and buyers of green homes do to get a fair appraisal and the right mortgage?
First they should require that their appraiser is competent and knowledgeable about green building. Builders, buyers, lenders, and real estate professionals should provide their appraiser with documentation or a CD-ROM that lists the home’s green/energy efficient features, especially things not visible to the naked eye such as advanced framing or blown-in insulation. They can also support the greening of their local multiple listing service (MLS). It’s important that the MLS goes green to help provide evidence that appraisers need to valuate green homes.
What is on the horizon for green mortgages?
Short of a true green mortgage (which does not exist), the closest program is the FHA 203(k). This program can allow you to add both energy and green improvements to a home. There’s a lot more noise about them right now. I believe we will see some changes to the programs in the months to come but I encourage everyone in the industry to ask that their lender learn about these programs and start offering them.
What’s next for PorterWorks?
We continue to provide consulting on greening businesses and training. I will be speaking at various upcoming conferences, including Greenbuild in November and the International Builders’ Show in January.