by Phillip Henderson. Originally published at switchboard.nrdc.org
The White House today announced two initiatives at the sweet-spot where energy and finance intersect. The initiatives aim to help homeowners finance energy efficiency and solar improvements. It might sound too good to be true, but doing so can reduce utility expenses for the residents, improve property value, reduce pollution from power plants, and make better mortgage loans for FHA.
Financing is a focus of energy-related policy because the ability to borrow is often make-or-break for a homeowner’s decision to invest in efficiency work or rooftop solar, just as getting a mortgage is make-or-break for the decision to buy a house in the first place.
The Federal Housing Administration (FHA) was created in the 1930’s to help Americans buy houses — banks make mortgage loans, and FHA gives the bank insurance against loan losses. FHA also then sets the terms for loans eligible for loan insurance.
FHA announced today that borrowers can obtain additional proceeds at the time of purchase or refinance if the added funds are used to make energy-related repairs and improvements. To be eligible for the added loan proceeds, the homeowner can use of a streamlined measure of home efficiency (the Dept. of Energy’s Home Energy Score) to show the improvements will reduce expenses. While the amount of added proceeds is small (2%), this is the right idea. Program experience should quickly provide FHA (and others) with the information needed to consider expanding and broading the program.
FHA also announced today it will allow homeowners with FHA-insured loans to incur an additional loan through a PACE program to pay for efficiency and solar improvements. PACE is a program operated by many cities and states that allow loan payments to be made through property taxes. Reasonable standards for PACE loans (such as subordination of the PACE lien to the FHA-insured loan, and conforming to consumer protection requirements like the Truth in Lending Act) should provide greater certainty to both homeowners and local PACE programs. Two important companies announced today the standards sketched by FHA appear reasonable and would support further growth of the programs that have already helped many thousands of homeowners in a well-regarded California program (see comments of Renovate America here and Renew Financial here).
The two FHA initiatives make a ton of sense, even if one were only worried about the interests of FHA as a holder of risk on the underlying mortgage loans. Making a house more energy efficient or adding solar should add value to the house (though there is an important need for better studies on this point, existing literature support this conclusion) and reduce utility expenses for residents. Both factors should make for better loans — more valuable property means the house is more likely to sell for more than the loan, and lower utility expenses probably means a more affordable mortgage. FHA is right to take these initiatives.
The two initiatives are even more compelling in light of the widespread benefits that accrue to the community and nation from making energy-related improvements.
Consider for a moment how the mission of FHA itself is justified by both direct benefits as well as broader, indirect values. The direct advantages of FHA offering loan insurance are obvious – borrowers get lower cost loans, borrowers get loans that meet FHA standards, banks get higher loan volumes, and more. But the indirect benefits to the nation as a whole are very powerful, widespread, and not always obvious – greater economic activity from a more active housing market, more efficient capital markets, better lending institutions, and more. A more active housing market enables a more mobile and efficient workforce by increasing the confidence homeowners can sell their house in a reasonable amount of time to move to take a better job, and so on. (It’s more complex than that. FHA also brings risks and costs. But the illustrative point is correct).
A similar dynamic exists when homeowners (or owners of apartment buildings) make efficiency repairs and improvements (such adding insulation, or installing a high-efficiency heater) or install rooftop solar. These measures can improve the lives of residents with lower utility bills, better property conditions, greater resiliency. But the widespread benefits to the community and nation are also great, if not always obvious — a better utility system, more valuable housing stock, less toxic pollution from power plants, and so on.
This President gets it. Over the past several years the Obama Administration has implemented initiatives at the sweet spot of housing finance and energy improvements. For example, see FHA’s risk sharing deal with Fannie Mae for the important Green Refi loan to support efficiency in multifamily affordable housing. See my earlier description of FHA’s use of a modern energy code for new houses. See EPA’s work with Fannie Mae to implement Energy Star scoring for multifamily apartment buildings. See Fannie Mae’s collection of energy information on its multifamily buildings. And there’s much more.
The White House’s announcement today includes much more than the two FHA iniatives I have highlighted here, including emphasis on multifamily affordable housing (for a more full description, see my colleague Deron’s note here). It includes new funding and authority for the Administration’s very successful loan guarantee program to support energy-related innovation. And it includes needed clarity on the ability for state “Green Banks” to participate in certain programs to deliver project support.
Yet there is much more to do. Affordable housing in America is ripe for energy-related improvements that deliver benefits to residents, to owners, and to the nation (see here for more on the massive efficiency potential in affordable rental housing). The nation’s largest mortgage institutions, Fannie Mae and Freddie Mac, both still purchase loans without even asking if the house securing the loan meets minimal energy code requirements (see here for a more complete description). The announcements today indicate the Administration remains focused on continuing to address these important problems.