energy efficient mortgages and other green financial ... infrastructure summit... · 17/09/2018...
TRANSCRIPT
Energy Efficient Mortgages and Other Green Financial Products:New Drivers of Economic Development in Rhode Island
Brad HevenorRI Branch Chapter
of the Appraisal Institute
Carrie GillRhode Island
Office of Energy Resources
Sam RossOptimal Energy
Angela LiNational Grid
Rhode Island Infrastructure SummitSeptember 17, 2018
Energy Efficient Construction: Guiding PrinciplesComfortable
HealthyDurable
Simple, LogicalWell 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 Hurdles1. The market must be convinced that high-performance building features – and renewable energy components - have value.NOT the appraiser’s responsibilityResponsibility 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 ProgramsOrg. 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 Limit0-15% 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', includingdisaster 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
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:
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. --
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?
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 - CompetencyUSPAP's COMPETENCY RULE states that an appraiser must:1. be competent to perform the assignment;2. acquire the necessary competency to perform the
assignment; or3. decline or withdraw from the assignment.
Competency – Appraiser Education
Competency - Professional Development
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
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 FinancingRequires Access to Credit Score Does Not require Access to Credit Score
New Home Equity Line of Credit Existing Home Equity Line of CreditNew Credit Card Existing Credit Card
New Home Equity Loan Loan on 401k retirement accountRI HEAT Loan
Mortgage RefinancePersonal Loan
RIIB Residential Loan
Energy Efficient Mortgages and Other Green Financial Products:New Drivers of Economic Development in Rhode Island
Brad HevenorRI Branch Chapter
of the Appraisal Institute
Carrie GillRhode Island
Office of Energy Resources
Sam RossOptimal Energy
Angela LiNational Grid
Rhode Island Infrastructure SummitSeptember 17, 2018