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