Extra Credit for Efficiency

Massachusetts Realtor Craig Foley says he's hearing more and more about energy when he's out selling houses these days. The Northeast's unpredictable weather and its widespread reliance on oil—a fuel that in recent years has been more expensive than natural gas—have homebuyers demanding to know how much it's likely to cost them to stay warm in the frigid winters and cool in the baking summers. "Something we get all the time is a buyer asking the agent to provide oil or electricity bills," says Foley, chief of energy solutions for RE/MAX Leading Edge. "There's no question buyers are responding with their wallets."

(Koren Shadmi)Nationwide, energy costs eat up more than $2,000 of an average household's income each year, according to data from the Energy Information Administration—typically more than residents pay for property taxes or insurance. But that expense is rarely considered when it comes to valuing a house. In the eyes of mortgage lenders, a drafty home that leaks heat is no different than one with double-paned windows and a state-of-the art furnace.

That's something that Republican Sen. Johnny Isakson of Georgia, a former Realtor, wants to remedy. His bipartisan bill with Democratic Sen. Michael Bennet of Colorado would instruct federally backed mortgage giants Fannie Mae, Freddie Mac, and the Federal Housing Administration to consider energy costs in the mortgage-valuation process, alongside traditional factors such as an applicant's likely tax and insurance bills. "We're trying to change the old way in which lending was done," Isakson says. "People need to realize the benefits of having better savings for energy efficiency."

The Sensible Accounting to Value Energy, or SAVE, Act would set up a voluntary program through which homeowners could submit home-energy reports to be considered in the valuation process. Under guidelines drafted by the Housing and Urban Development Department, appraisers would consider future energy savings when assessing the value of a home, and would also factor energy savings into the debt-to-income ratios used by lenders to determine a borrower's ability to make payments. That would likely translate into approval for higher loans, and potentially better mortgage rates, for borrowers. The results would not only make efficient homes more valuable, supporters say, but would also give homeowners more purchasing power to make upgrades. "Before the recession, efficiency retrofits were really the purview of the wealthy, who could afford to make an environmental statement and not really worry about the payback," says Jerry Howard, CEO of the National Association of Home Builders. "But the availability and desirability has grown exponentially, and we've increased affordability. Now it's just trying to get financial institutions to recognize [that] the savings for consumers can more than offset the added cost to the mortgage."

NAHB is one of a diverse group of SAVE Act supporters, including the U.S. Chamber of Commerce, the Natural Resources Defense Council, and the National Association of Realtors. The bill seemed to have a path to Senate passage as part of a bipartisan energy-efficiency package last spring, but it was derailed amid a debate on unrelated amendments. A version of that package is expected back early next year, although a pared-down variant (without the SAVE Act) is under consideration in the current lame-duck session.

Isakson's idea isn't new—the lawmaker says it's modeled in part on Georgia's GoodCents Housing program, which offers energy audits and affordable retrofits. The FHA currently has a program that allows borrowers to incorporate the cost of energy retrofits into a mortgage, but it's little more than a niche product.

Cliff Majersik, the executive director of the nonprofit Institute for Market Transformation, says that most lenders just don't understand how to incorporate energy costs into their standard practice, but that Isakson's bill could change that. "If this is mandated by legislation and backed by federal lenders, then your standard mortgage is going to change," says Majersik, whose group promotes green building and supports the bill. "Energy prices have gone up, efficiency has gone up. This is just keeping up with the times."

Foley, who leads classes on energy costs for real-estate agents, believes the proposal itself has been beneficial, by helping to bring the issue into the home-buying conversation. If more people start to have energy audits and put a dollar value on the savings that efficiency provides, he says, both the industry and the market will begin to catch on. "We've got a lot of Realtors, and they know how to sell a granite counter top, but they don't understand the value of a green home or how to market it," Foley says. "You're talking about things on an invisible scale. This would push it forward in the trade and appraisal organizations, and give buyers of clean homes more power."