[PPT] - Energy Efficient Mortgages and Other Green Financial Products: New PowerPoint Presentation

SLIDE 1

Energy Efficient Mortgages and Other Green Financial Products: New Drivers of Economic Development in Rhode Island

Brad Hevenor

RI Branch Chapter

f the Appraisal Institute

Carrie Gill

Rhode Island Office of Energy Resources

Sam Ross

Optimal Energy

Angela Li

National Grid

Rhode Island Infrastructure Summit September 17, 2018

SLIDE 2

Energy Efficient Construction: Guiding Principles

Comfortable Healthy Durable Simple, Logical Well Built Cost Effective (?)

Energy Efficiency as a byproduct

SLIDE 3

Mechanic Street Passive House

SLIDE 4

Passive House Meets Market Value

SLIDE 5

Real Estate Appraisal (URAR)

“Energy Efficient Items” A blank space = $0

SLIDE 6

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

SLIDE 7

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.

SLIDE 8

State Perspective

SLIDE 9

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

rder 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?

SLIDE 10

Green Mortgages: Federal Programs

Org. Fannie Mae Freddie Mac FHA VA Product HomeStyle Energy 'Energy Conservation Improvements' Energy Efficient Mortgage Energy Efficient Mortgage 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) Loan Size Limit 0-15% of home value, though a few different methods for determining exact value Energy conservation improvements terms dictated by the underlying loan product Range of methods, either reliant on home value or cost-effectiveness of improvements Three Tiers with different requirements: $3000, $6000, or greater than $6000 Notes on Scope 'Energy and Water', including disaster repair Energy conservation improvements terms dictated by the underlying loan product energy efficiency, underwriting, renewables, and weatherization Specific to energy efficiency upgrades to existing homes

SLIDE 11

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?

SLIDE 12

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

SLIDE 13

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: Question: Is this a problem for Green Mortgages as an EE/renewable finance tool?

Program Average FICO Tiered Offering based on FICO? Average Debt-to-Income Ratio New York On-Bill-Recovery 747 Yes 33% Connecticut Green Bank Smart-E 739 Yes 30% California R-PACE 710 No formal FICO reqs.

SLIDE 14

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)

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

Recipient’s reduced cash flow risk Better rate, better LTV, larger loan Improved market position Q: Other benefits?

SLIDE 15

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

SLIDE 16

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.

SLIDE 17

Competency – Appraiser Education

SLIDE 18

Competency - Professional Development

SLIDE 19

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.

Appraised Value and Energy Efficiency: Getting it Right

SLIDE 20

Appraisal Institute Green and EE Addendum

AI’s Addendum standardizes the communication

f 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

SLIDE 21

Appraisal Institute Green and EE Addendum

SLIDE 22

Modeled and Verified Energy Performance = Value

SLIDE 23

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

SLIDE 24