Energy Efficient Mortgages and Other Green Financial Products: New Drivers of Economic Development in Rhode Island Rhode Island Infrastructure Summit September 17, 2018 Carrie Gill Brad Hevenor Sam Ross Angela Li Rhode Island RI Branch Chapter Optimal Energy National Grid Office of Energy Resources of the Appraisal Institute
Energy Efficient Construction: Guiding Principles Comfortable Healthy Durable Simple, Logical Well Built Cost Effective (?) Energy Efficiency as a byproduct
Mechanic Street Passive House
Passive House Meets Market Value
Real Estate Appraisal (URAR) “Energy Efficient Items” A blank space = $0
Contributory Value - 3 Hurdles 1. The market must be convinced that high-performance building features – and renewable energy components - have value. NOT the appraiser’s responsibility Responsibility of policymakers, builders, designers, brokers, certifying organizations, non-profits, and government agencies promoting high performance buildings. 2. Building technology must be understood . 3. The market reaction to the building features and attributes must be measured . THE APPRAISER’S RESPONSIBILITY
Barriers to Recognizing Contributory Value • Lack of access to reliable, high-quality data • Underwriting impediments • Difficulty supporting market-based adjustments • Poor documentation of energy efficient features • Lack of awareness of new building technology • Confusing third-party certification programs • Unqualified appraisers Remember.. Appraisers are not the source of market value. The market - not the appraiser - determines the prices paid for high-performance properties and their energy efficient and renewable energy components. Appraisers develop values based on those reported market prices.
State Perspective
Green Mortgages: What’s out there? Energy Efficient Mortgages (EEMs) “a mortgage product where the potential for a building’s energy performance [and potentially wider sustainability performance] to reduce the risk profile of a loan secured against [the building] is reflected in the lender’s credit risk assessment in order to offer preferential terms to the borrower.” - EU Energy Efficient Mortgage Action Plan [emphasis mine] Federal examples: • Fannie Mae Homestyle Energy (restricted to existing properties) • Freddie Mac “Properties with Energy Conservation Improvements” • FHA Energy Efficient Mortgage Program • VA VA Energy Efficient Mortgage Question: How can Rhode Island bring clarity to customers about these offerings?
Green Mortgages: Federal Programs Org. Fannie Mae Freddie Mac FHA VA 'Energy Conservation Product HomeStyle Energy Energy Efficient Mortgage Energy Efficient Mortgage Improvements' New Construction Permitted No Yes No No Non-Res Permitted No No No No Pay Other Loans Yes Yes No No Cost-Effectiveness Test No No Yes No Home Energy Assessment Yes No Yes Varies (see below) Range of methods, either 0-15% of home value, though a Energy conservation Three Tiers with different reliant on home value or Loan Size Limit few different methods for improvements terms dictated by requirements: $3000, $6000, or cost-effectiveness of determining exact value the underlying loan product greater than $6000 improvements Energy conservation energy efficiency, 'Energy and Water', including Specific to energy efficiency Notes on Scope improvements terms dictated by underwriting, renewables, disaster repair upgrades to existing homes the underlying loan product and weatherization
Green Mortgages in Rhode Island • General knowledge of EE & Renewables • Traditional mortgages widely available • EERMC, Grid, OER, and others support specialized energy efficiency and renewable financing (more on that later!) • However, could not find any widely available green mortgages in RI • If you offer them, please reach out after the presentation! Question: Does Rhode Island need Green Mortgages? If so, should we rely on federal programs, or have our own?
Borrowers: Who Wants a Green Mortgage? • Potentially a very large market • Range of possible customers: • Traditional mortgage seekers • Those who value home performance • People with environmental motivations • Those interested in energy efficiency for financial reasons
Borrowers: FICO and Debt-to-Income • Generally speaking, energy efficiency finance programs attract a high average FICO • Some summary figures from relevant programs across the country from the upcoming White Paper on Green Mortgages: Tiered Offering Program Average FICO Average Debt-to-Income Ratio based on FICO? New York On-Bill-Recovery 747 Yes 33% Connecticut Green Bank Smart-E 739 Yes 30% California R-PACE 710 No formal FICO reqs. -- Question: Is this a problem for Green Mortgages as an EE/renewable finance tool?
Lenders: The Business Case • Green mortgages acknowledge the improved risk profile when mortgages cover energy efficiency and other high-performance features • Exactly how each lender uses this knowledge may differ (e.g. competing on interest rate, loan size, or other axes) Better rate, Improved Recipient’s Q: Other reduced cash market better LTV, benefits? position flow risk larger loan • The benefits shown each depend on certain actors in the real estate space, e.g.: • Improved rates and/or larger loans depend on lenders’ incorporation of reduced risk associated with improved cash flow due to lower energy costs, less exposure to fuel costs and their changes over time • Changes in LTV rely on appraisers’ incorporation of the value of high performance features into home prices
Source: RI Green Mortgage White Paper • A collaborative effort between • Rhode Island Office of Energy Resources (OER) • Rhode Island Infrastructure Bank (RIIB) • Rhode Island Energy Efficiency and Resource Management Council (EERMC) consultant team • Preliminary findings from the paper helped inform my presentation • Highlights Green Mortgages and their potential to positively impact Rhode Island • Expected release in Fall 2018
Appraiser Professionalism - Competency USPAP's COMPETENCY RULE states that an appraiser must: 1. be competent to perform the assignment; 2. acquire the necessary competency to perform the assignment; or 3. decline or withdraw from the assignment.
Competency – Appraiser Education
Competency - Professional Development
Appraised Value and Energy Efficiency: Getting it Right Explains why there’s an issue: Changes in market demand, energy code updates Fannie Mae, Freddie Mac, FHA requirements for competency Explains: How to prepare a loan applicant for the mortgage application and appraisal What a loan applicant needs to do when seeking the mortgage How to work with financial institutions to ensure selection of qualified appraisers .
Appraisal Institute Green and EE Addendum AI’s Addendum standardizes the communication of the features of high performance homes. Identifying the features not found on the 1004 form provides a basis for comparable selection and analysis of these features. Builders, contractors, homeowners, and third party verifiers are encouraged to complete this Addendum and present to appraisers, agents, lenders, & homeowners. Tell the appraiser what is behind the walls
Appraisal Institute Green and EE Addendum
Modeled and Verified Energy Performance = Value
Other Finance Products • RI’s 0% HEAT Loan for Energy Efficiency upgrades • Began in 2011 • 7 local lenders • 5,383 customers served • $32.9 million in financed energy efficiency improvements Other types of Residential Financing Requires Access to Credit Score Does Not require Access to Credit Score New Home Equity Line of Credit Existing Home Equity Line of Credit New Credit Card Existing Credit Card New Home Equity Loan Loan on 401k retirement account RI HEAT Loan Mortgage Refinance Personal Loan RIIB Residential Loan
Energy Efficient Mortgages and Other Green Financial Products: New Drivers of Economic Development in Rhode Island Rhode Island Infrastructure Summit September 17, 2018 Carrie Gill Brad Hevenor Sam Ross Angela Li Rhode Island RI Branch Chapter Optimal Energy National Grid Office of Energy Resources of the Appraisal Institute
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