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Energy Efficient Mortgages

By matthew.brown | March 24, 2008

As part of work that I am doing with the Energy Programs Consortium (www.energyprograms.org) I am focused heavily on development of a new energy efficient mortgage product.

The idea behind an energy efficient mortgage is simple — make an investment in energy efficiency and energy bills decline as a result. Lower bills free up money that can be put towards slightly higher mortgage payments — which means that borrowers should be able to qualify for a bigger mortgage. Incorporate energy efficiency investments into that mortgage and you’re now paying for those improvements over the life of the mortgage. If borrowers hold on to their mortgage for a long time, this could be a good thing.

Unfortunately, the energy efficient mortgage concept never really took off. It required energy audits, which were often cumbersome. It required lenders to fill out new forms. It required that money be put into escrow while energy efficiency work was completed. And energy efficiency mortgage interest rates were the same as those for a traditional mortgage — so there was little incentive for borrowers to go through the hassle.

The product that I am working on would look to use a variety of outside sources of credit supports and interest rate buydowns in order to bring the interest rate down. We are looking at state funds that could be applied to this purpose, and also looking at federal sources of loan guarantees to further increase the creditworthiness of these loan portfolios. We are also focusing on the audit protocols — trying to find a way to reduce the amount of time required to conduct an energy audit that will be acceptable to the lending institutions and to the investors that buy energy efficient mortgages.

The goal of this effort is not small — it is to try to transform a large industry that’s also in a lot of trouble right now. Energy efficient mortgages are, in theory at least, a way to finance measures to improve the quality of houses — they should be a better quality investment than many other kinds of mortgages for that reason. We don’t yet have the data to prove that, but the ultimate goal is to bring these mortgages into the mainstream as a high quality, potentially lower risk product that could inherently deserve a lower interest rate than would be given to a typical mortgage.

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Energy Efficient Mortgages