Energy-Efficient Mortgages: What Role Could They Play in the Housing Crisis?

by: Bill Paul

Energy efficient mortgages (EEMs) would appear to have a key role to play in dealing with the mortgage meltdown that is at the heart of the global credit crisis.

Most houses, even new ones, are energy inefficient. By adding insulation, changing appliances, improving heating and cooling systems, and so on, tens of millions of homes could be made more energy efficient in a short period of time. An energy efficient home costs less to own because its utility bills are substantially lower. Thus, by making millions of homes more energy efficient, tens of millions of Americans would have a better chance of keeping a roof over their heads – and even having a few bucks left over at the end of the month.

Government and some private lenders have been writing EEMs for years. With an EEM, a homeowner includes the cost of energy efficiency improvements in his home mortgage. While this results in an increase in the homeowner’s monthly mortgage payment, the increase is more than offset by lower utility bills. The homeowner winds up paying less per month for a house that is worth more.

According to the U.S. government’s Federal Citizen Information Center, an older existing home that was worth $150,000 before energy efficient improvements are made is worth $154,816, after. Including the cost of these improvements in a 90% mortgage on that house would increase the mortgage from $135,000 to $139,334. Assuming an 8% interest rate, the owner’s monthly mortgage payment (exclusive of taxes) would rise from $991to $1,023, however, his energy bills would drop from $186 a month to $93 a month, for a net monthly saving of $61.

What’s needed now is a federal program aimed at qualifying tens of millions of houses for EEMs.

Such a program would do the following:

  • Increase the total value of America’s housing stock by probably more than $100 billion and make many troubled mortgages more attractive to potential buyers;
  • Stimulate the economy because it would provide an incentive for consumers to spend on a range of household items. (Even shade trees and window drapes can significantly affect household energy use);
  • Create jobs, beginning with the trained experts who prepare Home Energy Rating Systems (HERS) reports. These are analyses used by lenders of which energy efficiency improvements make economic sense for a given house. Many more jobs would be created to handle the manufacture, sale and installation of new energy efficient appliances, heating and cooling systems, and other efficiency measures.

More state governments are requiring their utilities to ramp up energy efficiency efforts, and these utilities anxious to avoid the capital cost of building new power plants. Combine this with the fact that every American is anxious to avoid adding to greenhouse gas emissions from power plants, and it would seem that a federal program whose ultimate objective was to qualify every house in America for an EEM would be an easy political sell.

Indeed, if figures compiled by McGraw-Hill Companies’ construction unit are correct, homeowners are salivating at the thought of living in a resource-efficient home (e.g., energy, water, land and indoor air quality). Last year, the unit forecast that the green home market in the U.S. would surge over the next several years. (See, "New Report: ‘Green’ Home Market Seen Rising 900% Over Next 5 Years to $20 Billion vs. $2 Billion Today.")

Disclosure: No positions