How Banks Can Make Money On Energy Efficient Mortgages

Courtesy of Spartacus Pustota via a Flickr Creative Commons license.

A Forbes magazine contributor, Jennifer Kho, has written a thought-provoking article on the value to banks who underwrite energy-efficient mortgages (EEMs) which include the cost of upgrades.  Read the article and add your comments below.

From Jennifer Kho, Forbes contributor:

Energy-efficiency improvements, such as installing new boilers or roof insulation, can save building owners big bucks in the long term. A study released by theAmerican Council for an Energy-Efficient Economy (ACEEE) on Wednesday found that energy efficiency could save consumers an average of $400 billion per year.

But the upfront costs of these improvements are often too high for owners to pay outright, and it’s also difficult to get financing for energy-efficiency improvements. That could change, thanks to a Deutsche Bank study of affordable-apartment retrofits in New York City.

Researchers found that half of the projects included in the study yielded enough energy savings to pay for themselves in 30 years or less. The study, published this week, also compiled information about the average energy savings that different types of buildings reaped from a variety of improvements.

How could that help owners get financing? Mortgage lenders don’t usually include the long-term energy savings in their home-loan calculations today, says Sam Marks, vice president for the Deutsche Bank Americas Foundation and Community Development Finance Group. Instead, all maintenance and operating expenses – including energy – usually get lumped together, with expected standard increases of 2-3 percent per year, he says.

“There’s a basic underwriting process, and there hasn’t been much interest in changing that,” he says. “The private market is not interested, right now, in doing a lot of newfangled things.”

Deutsche Bank hopes the benchmarks from its study will make it easier for lenders to determine how much money different types of projects are likely to save and will give them the confidence to include those expected savings in their loan calculations. The idea is that more financial institutions would be willing to underwrite slightly larger loans to pay for energy-efficiency upgrades – adding the cost of the upgrades to the size of the owners’ mortgages – if they’re confident that the savings from the upgrades will ultimately make up the cost.

The study also includes specific suggestions for how lenders can incorporate the energy savings into their underwriting process. Those tools could open up more financing for such improvements, and, in turn, give the energy-efficiency market a big boost. That’s because financing has long been a major bottleneck for the sector.

Ron Pernick, managing director of cleantech-research firm Clean Edge, calls the Deutsche Bank study “telling and important.” Banks, insurers and other financial players see the opportunity in energy-efficiency projects, but don’t have the financing tools and infrastructure in place to get the deals done, he says.

“In a lot of ways, energy efficiency is an unsung hero,” he says. “The cost has come down in the last couple of years and these projects pencil out. People can make money out of these projects. But it’s only going to happen if we figure out the financing.”

It’s also significant that the study focused on apartment buildings, which represent potentially larger projects than single-family homes, Pernick adds. “It’s like solar five or 10 years ago, which started out as something distributed on a home rooftop and now has increasingly gone into larger commercial, industrial and utility-scale projects too,” he says. “We’re going to move to deep-scale deployments and multiple-family retrofits, and I think it’s the right thing – that’s where you get the biggest bang for your buck.” The ACEEE study also concludes that larger energy-efficiency projects could deliver greater returns.

Marks says the Deutsche Bank study focused on affordable-apartment buildings for several reasons. First of all, this type of housing has been getting state funding, making data about these buildings publicly available. It also represents a big potential opportunity for energy-efficiency savings: A McKinsey study in 2009 estimated that energy-efficiency measures in low-income residential buildings could save $80 billion, at a cost of approximately $46 billion, with almost a quarter of that potential coming from multifamily buildings.

“We feel there’s a critical mass of this type of housing that, if we can solve the financing problem, we could really move the needle on low-carbon development,” Marks says. “It’s the bread and butter of the housing market in New York City.”

In addition, affordable and rent-stabilized housing has been among the most innovative when it comes to energy efficiency, he says: “Energy efficiency is really a matter of survival for this kind of housing.” Because heat and hot water costs are usually included in New York City rents, owners of rent-stabilized housing are allowed to raise rents in order to pass along increased energy costs.

Living Cities, a philanthropic collaborative, plans to help put the Deutsche Bank study’s suggestions into practice. The group this week announced a $150,000 grant to the New York City Energy Efficiency Corp. to “credit enhance” energy-efficiency loans for affordable apartment buildings. In other words, it will certify the portion of the loans intended for energy-efficiency projects. The hope is that the enhancements will entice lenders to create larger mortgages to cover energy-efficiency upgrades, Marks explains.

Community development financial institutions, other lenders focused on protecting the environment or improving affordable housing and cutting-edge community banks will likely be the first to adopt the study’s suggestions, he says.

One response to “How Banks Can Make Money On Energy Efficient Mortgages

  1. It seems strange to me that those who promote free markets are opposed to free market solutions to such issues.

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