Next Generation Energy Efficiency Mortgages, Resnet Conference 2010

EEMs & EIMs: The Next Generation Allison A. Bailes III, PhD & Geoff Ferland 24 February 2010, RESNET Conference

Purpose “An EEM recognizes the energy savings of a home that has ‘cost effective’ energy saving improvements that increase the energy efﬁciency of a home.” -- 1993 HUD Mortgage Letter

New Homes

Improvements on Existing Homes

Improvement Example Summary Existing Home Improved Home Price $200,000 $203,200 Loan Amount $160,000 $162,560 Monthly Payment* $908 $923 Energy Bills $302 $256 True Monthly Cost $1210 $1179 Monthly Savings $31 * 30 year loan, 5.5% interest

What’s the Payback? Cost Simple Payback = Savings $3200 = $552/yr = 5.8 years

Takeaway

Takeaway ✤ Payback is irrelevant!

Takeaway ✤ Payback is irrelevant! ✤ It’s all about cash ﬂow for homeowner/ buyer.

History

History ✤ 1979 Solar Bank proposal

History ✤ 1979 Solar Bank proposal ✤ 1993 HUD Mortgagee Letter

History ✤ 1979 Solar Bank proposal ✤ 1993 HUD Mortgagee Letter ✤ Pilot, 5 states, $8000 cap

History ✤ 1979 Solar Bank proposal ✤ 1993 HUD Mortgagee Letter ✤ Pilot, 5 states, $8000 cap ✤ 1995-2009 HUD Mortgagee Letters

History ✤ 1979 Solar Bank proposal ✤ 1993 HUD Mortgagee Letter ✤ Pilot, 5 states, $8000 cap ✤ 1995-2009 HUD Mortgagee Letters ✤ Restrictions lifted, including $8000 cap (in 2009)

Players & Products

Players & Products ✤ FHA/HUD

Players & Products ✤ FHA/HUD ✤ VA

Players & Products ✤ FHA/HUD ✤ VA ✤ Fannie Mae

Players & Products ✤ FHA/HUD ✤ VA ✤ Fannie Mae ✤ Freddie Mac

Players & Products ✤ FHA/HUD ✤ EEM ✤ VA ✤ Fannie Mae ✤ Freddie Mac

Players & Products ✤ FHA/HUD ✤ EEM ✤ VA ✤ EIM (RESNET term) ✤ Fannie Mae ✤ Freddie Mac

Players & Products ✤ FHA/HUD ✤ EEM ✤ VA ✤ EIM (RESNET term) ✤ Fannie Mae ✤ 203(k) ✤ Freddie Mac

Rater’s Perspective Existing Home Process

Rater’s Perspective Existing Home Process Initial Rating

Rater’s Perspective Existing Home Process Initial Rating Improvement Analysis

Rater’s Perspective Existing Home Process Initial Rating Improvement Analysis Reporting

Rater’s Perspective Existing Home Process Initial Rating Improvement Analysis Reporting Followup Inspection

Cost Effectiveness Time Value of Money $100 of Future Value (e.g., energy savings) is worth less than $100 in Present Value.

Present Value Calculation Single payment

Present Value Calculation Annual payments HERS Standards, pp. 3-10 - 3-12

Present Value Calculation PV = Present Value FV = Future Value i = interest rate n = number of years A = annual savings - maintenance costs

Improvement Example Leaky, old house in Atlanta Reduce inﬁltration: 7531 cfm50 --> 3766 cfm50 Reduce duct leakage: 1077 cfm25 --> 269 cfm25

Improvement Example Cost for both $3200 Annual savings $551 Maintenance costs $0

Improvement Example Interest rate 5.5% Lifetime 23 years

Improvement Example

Improvement Example PV = $551 * (1- 1/(1+ 0.055)23)/ 0.055

Improvement Example PV = $551 * (1- 1/(1+ 0.055)23)/ 0.055 = $551 * 12.875

Improvement Example PV = $551 * (1- 1/(1+ 0.055)23)/ 0.055 = $551 * 12.875 = $7094

Improvement Example PV = $551 * (1- 1/(1+ 0.055)23)/ 0.055 = $551 * 12.875 = $7094 Total savings over 23 years: $12,673.

Improvement Example Cost Effective?

Improvement Example Cost Effective? PV = $7094

Improvement Example Cost Effective? PV = $7094 Cost of improvements = $3200

Improvement Example Cost Effective? PV = $7094 Cost of improvements = $3200 Net PV = +$3894

Improvement Example Cost Effective? PV = $7094 Cost of improvements = $3200 Net PV = +$3894 Positive ==> Cost effective

Present Value Variables 5.5% 8% 23 years $7094 $5714 10 years $4153 $3697

Present Value Variables 5.5% 8% 23 years $7094 $5714 Higher PV from: 10 years $4153 $3697

Present Value Variables 5.5% 8% 23 years $7094 $5714 Higher PV from: ✤ Lower interest 10 years $4153 $3697

Present Value Variables 5.5% 8% 23 years $7094 $5714 Higher PV from: ✤ Lower interest ✤ Longer lifetimes 10 years $4153 $3697

REM/Rate Improvement Analysis

Reporting

Reporting ✤ Basic info (Address, client name, property type...)

Reporting ✤ Basic info (Address, client name, property type...) ✤ Description of current energy features

Reporting ✤ Basic info (Address, client name, property type...) ✤ Description of current energy features ✤ Description of energy package

Reporting ✤ Basic info (Address, client name, property type...) ✤ Description of current energy features ✤ Description of energy package ✤ Estimated cost, useful life, & maintenance costs of energy package

Reporting ✤ Basic info (Address, client name, property type...) ✤ Description of current energy features ✤ Description of energy package ✤ Estimated cost, useful life, & maintenance costs of energy package ✤ Estimated current & projected energy costs

Reporting ✤ Basic info (Address, client name, property type...) ✤ Description of current energy features ✤ Description of energy package ✤ Estimated cost, useful life, & maintenance costs of energy package ✤ Estimated current & projected energy costs ✤ Estimated annual savings & present value

Reporting

Reporting ✤ Names & signatures of ﬁeld inspector (if any) and rater

Reporting ✤ Names & signatures of ﬁeld inspector (if any) and rater ✤ The following certiﬁcation:

Reporting ✤ Names & signatures of ﬁeld inspector (if any) and rater ✤ The following certiﬁcation: “I certify to the best of my knowledge and belief, the information contained in this report is true and accurate and I understand that the information in this report may be used in connection with an application for an Energy Efficient Mortgage to be insured by the Federal Housing Administration of the U.S. Department of Housing and Urban Development.”

Followup Inspection

Followup Inspection From HUD Mortgagee Letter 2005-21:

Followup Inspection From HUD Mortgagee Letter 2005-21: “The lender, the rater, or an FHA fee inspector may inspect the installation of the improvements.”

Barriers to Widespread Use of EEMs

Barriers to Widespread Use of EEMs ✤ EEMs have not been user friendly.

Barriers to Widespread Use of EEMs ✤ EEMs have not been user friendly. ✤ Lenders & underwriters aren’t aware of them.

Barriers to Widespread Use of EEMs ✤ EEMs have not been user friendly. ✤ Lenders & underwriters aren’t aware of them. ✤ Lenders & underwriters don’t understand them.

Barriers to Widespread Use of EEMs ✤ EEMs have not been user friendly. ✤ Lenders & underwriters aren’t aware of them. ✤ Lenders & underwriters don’t understand them. ✤ Realtors are afraid of them.

Barriers to Widespread Use of EEMs ✤ EEMs have not been user friendly. ✤ Lenders & underwriters aren’t aware of them. ✤ Lenders & underwriters don’t understand them. ✤ Realtors are afraid of them. ✤ Homeowners/buyers aren’t aware of them.

PACE ✤ Property-Assessed Clean Energy

PACE ✤ Property-Assessed Clean Energy ✤ Finances energy improvements through property assessment

PACE ✤ Property-Assessed Clean Energy ✤ Finances energy improvements through property assessment ✤ Stays with the property, not the borrower

ENERGY STAR Mortgages

ENERGY STAR Mortgages ✤ Similar to EEMs but without stretch ratios

ENERGY STAR Mortgages ✤ Similar to EEMs but without stretch ratios ✤ For homes certiﬁed in:

ENERGY STAR Mortgages ✤ Similar to EEMs but without stretch ratios ✤ For homes certiﬁed in: ✤ ENERGY STAR new homes

ENERGY STAR Mortgages ✤ Similar to EEMs but without stretch ratios ✤ For homes certiﬁed in: ✤ ENERGY STAR new homes ✤ Home Performance with ENERGY STAR

ENERGY STAR Mortgages ✤ Similar to EEMs but without stretch ratios ✤ For homes certiﬁed in: ✤ ENERGY STAR new homes ✤ Home Performance with ENERGY STAR ✤ Weatherization Assistance Program

ENERGY STAR Mortgages ✤ Similar to EEMs but without stretch ratios ✤ For homes certiﬁed in: ✤ ENERGY STAR new homes ✤ Home Performance with ENERGY STAR ✤ Weatherization Assistance Program ✤ Can be combined with EEM

Architecture 2030

Architecture 2030 ✤ Ed Mazria

Architecture 2030 ✤ Ed Mazria ✤ Includes mortgage rate buydown tied to energy improvements

Architecture 2030 ✤ Ed Mazria ✤ Includes mortgage rate buydown tied to energy improvements ✤ 2.5% interest rate for 75% reduction in energy use, for example

Allison A. Bailes III, PhD Geoff Ferland Energy Vanguard EcoLend 404-428-3393 828-479-LEND (5363) abailes@energyvanguard.com geoff@ecolend.com energyvanguard.com www.EcoLend.com www.facebook.com/EcoLend twitter.com/EnergyVanguard twitter.com/EcoLend www.LinkedIn.com/in/EcoLend

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Next Generation Energy Efficiency Mortgages, Resnet Conference 2010

by Bailes III Allison A

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