Introducing the New PowerSaver Loan Program from HUD/FHA (Text Version)
Brett: Hi, this is Bret Kadison with the Department of Energy. Thank you for joining us today on the webinar on FHA PowerSaver. As you know, the Department of Energy has been focused on using the recovery act to bring private capital to support energy efficiency lending as well as to support energy efficiency over all. The lynchpin to doing energy efficiency and bringing it to market right now has really been getting the capital engaged in the market to make retrofits possible on a large scale.
To that end, the Department of Energy has been working with our grantees to help come up with financing programs, as you all are well aware. The Department of Energy, however, isn't alone in that. HUD and FHA have been working to develop an innovative new financing tool called the PowerSaver, which is based on a similar product that FHA has right now based on Title I lending, which Stockton Williams will be talking about in a minute. Stockton Williams is with the Office of Housing and Urban Development and has been leading the charge to develop the PowerSaver product, and he is here now and he is about to walk us through a presentation on PowerSaver and we will address all questions in the end. But without further ado, I'll hand it over to Stockton.
Stockton: Hi, good afternoon or good morning depending on where you are. Thank you all, everyone, for your interest in today's presentation. We understand we have a lot of you on the phone and so I will spend several minutes going through a discussion of FHA's new finance initiative for single-family home improvements called PowerSaver. But if you've got questions as I'm going, don't worry. We have plenty of time to take them all at the end. So I want to make sure we have that opportunity for discussion. Also, as you'll see as we start to go through the slides, everything that we'll discuss today is available for you all to read in even more detail on HUD's Web site on links that are posted in this presentation, so don't feel like you have to write down every single thing that we talk about today. There'll be plenty of time for follow up.
I also want to start by thanking Bret Kadison and Brandon Belford from the Department of Energy who are here with me, and many other colleagues of ours at HUD at DOE. HUD and DOE have worked very closely on this initiative, on a number of other initiatives to expand home energy retrofits. And it's just a tremendous partnership that we feel terrific about and hopefully this new program will be another successful endeavor of the two agencies together. So let's get started on PowerSaver.
So let's get started, and we'll go through some of this background quite quickly because I know it's very familiar to all of you. But obviously, there's a huge need and an opportunity to make single-family homes more energy efficient. It's a top priority of the Obama administration and of those of us at HUD who are obviously part of that administration. We see the opportunity in home retrofit to obviously reduce energy use and carbon emissions, but also save families money and create jobs. And so it really is a multiple-win scenario and the challenge for us is how can we scale up retrofits and make it more possible for more homeowners to do retrofits on a more cost-effective basis.
As Bret said, one of the big barriers - not the only one, but one of the big ones - is a lack of financing. For most folks, coming up with the upfront capital to pay the cost of the retrofit is a real challenge. And so the FHA PowerSaver program is really designed to provide a new resource to consumers to enable them to afford to make energy improvements to their homes. So let's talk about PowerSaver. There are, as I think many of you know, a handful of options for homeowners today to access financing, to make their homes more energy efficient. There are consumer loans and credit card products. There are home equity line type of products for folks with outstanding credit and significant equity in their homes.
You may be fortunate to live in an area where your utility offers you a chance to pay back a retrofit loan on your home energy bill. But for the most part, a lot of the initiatives that DOE is now helping to support and take to scale have been pretty small in the past and they haven't been widely available. One of the reasons is that the products that have been typically focused on the single-family home retrofit market haven't always been economic and viable for mainstream financial institutions to offer. So FHA's PowerSaver program is really designed to create a financing product that mainstream lending institutions will be able to offer to consumers.
One of the really important features of the PowerSaver loan that we wanted to flag for everybody up front is these are typically going to be mortgage loans. There is an exception to that that we'll get to as we get to the presentation, but these will be mortgage loans and they will be mortgages that area subordinate or second position if there is an existing first mortgage on the home. So they will not supersede a first mortgage lien if there is a first mortgage lien on a home. FHA's got two goals with this program that I just wanted to make sure everybody fully understood because a PowerSaver is starting out as a pilot and we are hopeful and optimistic that it's gonna provide real value in the marketplace and if it does, and if the loans perform well as we expect they will, this potentially could be a permanent FHA program in the future. But we have to prove that it works.
So we really have two goals. One is to create a mainstream mortgage product that can be offered through various kinds of traditional lending institutions resulting in low-cost financing for consumers and that we can create liquidity. In other words, the means for lenders to make more loans. As we hope the demand for homeowner retrofit financing will increase, we want to make sure there are opportunities in the secondary market for lenders who would like to continue to make loans to have the liquidity to do so.
The second thing that we want to do in the PowerSaver pilot is really important, and that is to really get good data and evidence on the costs and benefits of home energy improvements. There's been a lot of study of home energy improvements over the years, but we still don't have the kind of data we need to make the case to mainstream financial institutions that retrofit financing makes a lot of sense. So we're really gonna be working hard to study what happens after retrofit loans are made. Do families realize the energy savings and the bottom-line economic benefits that we expect, and do homes appreciate in value as a result of the energy improvement?
We certainly think that more energy-efficient homes should be recognized as more valuable in the market, but now that's an uncertain proposition, and in part that's because we just don't have as much data on that as we need. Now we did say a little bit about the program overall, and then we'll talk some about the details and open it up to questions. As I mentioned, the PowerSaver initiative is a two-year pilot program. So what that means is for the first two years, FHA will be working with a limited number of lenders to make PowerSaver loans available and really to evaluate how the program performs in the market and what we learn from it.
So this at this pilot stage, we are looking for lenders and we are asking lending institutions. Lending institutions could be big, national banks, smaller community or regional banks, credit unions - really a wide range of financial institutions to submit expressions of interest that we'll talk about a little bit more to FHA in participating by the end of the year. Now the only real limitation on what kind of lender can participate in the program, which is an important one, is that the lender does have to be an FHA-approved Title I lender. Title I refers to one of the FHA home loan insurance programs, the basis for the PowerSaver initiative.
The good news is that if a lender is not a Title I approved lending institution, but is approved under FHA's Title II program, which is the regular FHA insured mortgage that everybody knows about, and many thousands of lenders are approved to make those kinds of loans, then the process to get approved to participate in the PowerSaver program will be quite straight forward and expedited. So by the time a lender would start to participate in the program, and they will have to be approved under the FHA Title I program rules - and we can talk a little more about that toward the end - I mentioned that we're looking for lenders to step up and express an interest in helping us prove out the PowerSaver concept by the end of the year.
During that period, we're also taking general public comments on the program. We love to hear from you all and others about the nuts and bolts of the PowerSaver and how we might think about making modifications or revisions to it as proposed before it becomes final. We don't have to change it, and if the general feedback from the public and participating lenders is that it looks pretty good, it probably will be a final program that looks very much like the proposed program that's out today. But we do welcome from you all, and others who might want to suggest modifications to it. Our goal is to be able to announce the final program and the participating lenders early in 2011.
So some key features just to kind of ground us as we turn to some more details of how the PowerSaver loans and loan insurance from the federal government will work. As I've mentioned, the PowerSaver is based on an FHA program called Title I Property Improvement. This is a long-standing, although fairly underutilized, FHA insurance program that has historically focused on home improvement. So the Title I program is really the basis - the sort of skeleton and bones of the PowerSaver initiative, but to really orient the program to home energy retrofit, and to provide incentives to lenders and direct benefits to consumers, FHA has made a number of important changes that really will be the focus of the presentation today. So there are additional underwriting and credit requirements for PowerSaver that do not apply to the regular FHA Title loan program.
There are also more specified uses of loan proceeds under PowerSaver than there are for Title I. In addition, there are a set of incentives for lenders to participate because particularly at this time in the lending industry, where there is so much stress and uncertainty, we want to make sure that lenders really do see motivation and incentive to help make PowerSaver successful. So there will be some incentives for the participating lenders and along the way, those incentives will be designed in such a way that the direct benefits ultimately accrue to consumers.
As we'll also discuss, one of the important features of PowerSaver that we are attempting to demonstrate is that idea of liquidity that I mentioned before. That for lenders who may not wish to hold on their books the PowerSaver loans they originate, we want to work to create options for them to sell them into a secondary market so that they'll have the ability to make more loans. That's how the mainstream home mortgage market has always worked in this country and not withstanding the recent challenges that we've been dealing with, that liquidity and that access to capital markets has been a critical feature in making our mortgage finance system what it has been.
The last thing that's really important to know is that while a wide range of lenders are certainly encouraged, and we hope will end up participating, we're really gonna be directing lenders to prioritized markets where communities have taken affirmative steps to promote and encourage home energy retrofit. The Department of Energy, our colleagues at the federal level, have done a remarkable job working with communities around the country, with grant dollars and technical assistance and other support in suburban areas, rural communities, larger cities, smaller cities. And we see all across the country an incredible enthusiasm and the makings of large-scale retrofit initiatives that include quality home energy audits, certification and other standards for retrofit workers and good programs and protocols for measuring and verifying the impact and the benefit of the retrofit programs.
We really think it's important for PowerSaver to not only be a resource to those initiatives, but also to really launch and pilot in those places where there is strong momentum and consumer interest in more energy-efficient homes. There are a couple of really important features of the Title I program - and don't worry, I'm not gonna go through every single section of the regulations on this call, but there's a couple of important features that PowerSaver has that reflects some of the statutory and regulatory requirements of Title I, which is the underlying insurance authority that we're using here.
One note, in case anyone is curious before we talk about the insurance features is FHA's main program, the FHA single-family home loan program that probably just about everyone is familiar with is actually capitalized with a separate fund than Title I and PowerSaver. These are different kinds of programs and they're budgeted and accounted for separately in the federal system. So this is separate from, in every possible way, FHA mainstream home loan insurance product.
So obviously, as a mortgage insurance program, the PowerSaver has got premiums, and that's really how FHA will operate the PowerSaver program on a self-sustaining basis. And it's an important fact of the program, because ultimately it will be reflected in the cost of funds and the cost of loans that are available to consumers. So we've just got a slide here that shows the premiums are one percent of the loan amount, which is a relatively modest amount given what we expect to be relatively modest-sized loans - and we'll talk about average loan size in a minute.
But it is important to know that these costs can't be financed as part of the loan. A number of the other typical costs, closing costs and others can be, which we'll describe, but the premium cannot be financed. You'll see the example there. Somebody had a $10,000.00 PowerSaver loan for an energy retrofit that was payable over 15 years, the premium would be $100.00 times 15, $1,500.00. Now the more important features, I think, and bear with us here because this is a part of the program that's important and a little bit complicated.
As folks who know the FHA mainstream program are aware, under that FHA insurance, homeowners have 100 percent credible insurance against loan default. The Title I program and the PowerSaver program it's based on operate a little differently. So the first major difference is under PowerSaver, the federal guarantee covers up to 90 percent of the loan amount in the event of default. Now 90 percent guarantee is still really good, but it's not 100 percent. So that is an important difference. You might be wondering why does it work that way. The reason is with the federal government covering no more than 90 percent, the rest of the accountability for a loan and for paying the cost of a default, if there is one, lies with the lender. That actually has a good effective of incentivizing a strong underwriter. So that's typically referred to as a co-insurant kind of setup where risk associated with the loan is shared by multiple parties, in this case the federal government takes 90 percent of the risk and the lender originating the loan takes the rest.
The other important feature of Title I and PowerSaver that is part of the insurance structure is what is called a portfolio cap. Basically what the portfolio cap in this program requires is that the total amount of federal insurance from FHA, the federal guarantee that can go as high as 90 percent on a given loan, in aggregate can't exceed 10 percent of the total amount in the lender's Title I portfolio. So in other words, there's a limitation on the amount of coverage of any one loan, and there's also a limitation on the overall amount of federal insurance that's available to a lender overall in making PowerSaver loans.
Now you might wonder, why is that feature in there? Well, it's actually a statutory requirement of the Title I program and it is, without question, a problematic feature for scaling up Title I loans and we think it will be important for us to make PowerSaver loans able to scale. So you've got a number of features built into the PowerSaver program that we need to and are designed to address this issue, but it's important for folks to understand and think about because it is - these are two important differences between Title I and PowerSaver and the regular FHA program that you might be familiar with.
I want to just draw everyone's attention to this slide. I don't really think it's productive to actually talk through it on a phone call, but in case you're stills scratching your head as I was for a number of weeks when I first learned about how this portfolio cap and coinsurance regime works, we've got an example here that shows how the insurance and federal guarantee works, and what the impact of the portfolio cap would be. The bottom line is this: if a lender is making sound underwriting decisions and really ensuring that consumers get the right amount of financing for the smartest improvement to make, we really expect the loans to perform well. The fact that the federal guarantee is limited to 90 percent of one loan and that there's a portfolio cap on the overall amount of insurance the lender can have access to, shouldn't be an issue because they will have more than enough federal coverage to account for what we expect to be very limited defaults or difficulties experienced by borrowers.
But there's no question that if in a lender's portfolio there are a high number or a high percentage of bad loans - a high percentage of default - the federal guarantee is going to be stretched and may not be sufficient to cover the full extent of losses that a lender may incur. So for lenders, that's really important. It would be simpler, of course, if it were just complete blanket 100 percent loan level insurance, but that's not how this program works. That's a statutory set of requirements that we have to deal with and we hope they'll also incentivize very talented underwriting.
I mentioned a couple of times that we have incentives for the program for lenders because as everybody knows, this is an extremely difficult time for the lending industry - a very challenging economic environment. And the truth is one of the reasons that home energy retrofit financing has been so hard to come by in those markets is that very small loans are typically just as much work for lending institutions as larger ones. But obviously, the fees and the margins are compressed. And so that's been a big challenge to getting home energy retrofit financing to be more widely available through mainstream lenders.
So we recognize that it's really important to create some incentives for lenders to get into this at the get-go. We hope over time that this will prove to be a very worthwhile business opportunity and that lenders will see it as such and be able to go forward without as much of the incentives, but the incentives are important at this particular time, as the program is launching. So one of them that is a little bit of inside baseball, but that will be relevant, I think, especially for any lenders on the call, is the FHA is really gonna strengthen and streamline the claims payment procedure. So claims are made and paid by FHA when loans go into default.
So one of the things that small loan programs, including the FHA Title I program have sometimes struggled with in the past, is a very quick, seamless and straight forward claims payment procedure, which we're going to include in PowerSaver so that if we get into the unfortunate situation where a loan does go into default and a claim has to be paid, there will be much greater clarity and, we hope, efficiency from FHA in making that claim payment to lenders.
The next incentive that is really important and a feature of PowerSaver that doesn't apply to other FHA programs, is we'll be making available incentive grants to participating lenders. We're doing this with appropriated funds, not out of FHA's insurance reserves, and we'll provide them to lenders for a handful of purposes. All were really designed to result in lower cost to borrowers. So one obvious example is to write down an interest rate. If a lender, in doing its calculation and developing its program can come up with an interest rate of X, it could utilize grant funds from FHA and the Power Save pilot to reduce that interest rate by some amount.
Another eligible use of funds that is related is smaller loans, like homeowner retrofit loans, will have servicing costs. They will require lenders to spend resources to service loans once they're originated. So those costs will typically ultimately be passed on to borrowers. So lenders will be able to access grant funds from HUD to lower servicing costs. We're gonna be looking very carefully at what lenders propose to do and how they actually do use the grant funds, because for FHA it will be actually required that any grant dollars that are going to be used in ways that bring direct benefit to borrowers.
There may be come other useful grant funds that are suggested in the public comment period that we'd consider. And to the extent that they make the program more efficient and effective and a better opportunity for homeowners, the FHA will be very interested to hear the kinds of thoughts that you all and others may have. The next three or four slides go through in some detail some of the underwriting and credit criteria in other rules of the Title I, and now PowerSaver, program. And so I'm gonna just touch on a few here. We can certainly come back to any with questions, but I want to make sure that we have ample time for discussion.
But some of the ones that I think are probably on everyone's mind are listed on this slide that we're all looking at. The maximum loan amount can be as high as $25,000.00. Now we don't necessarily think that the average-sized or that the typical PowerSaver loan is going to be anywhere near that large. A home energy retrofit improvement may be more along the lines of $8,000.00 or $12,000.00 or something less than twenty-five. The $25,000.00 is a maximum and it might be the case that a relatively small share of PowerSaver borrowers need to borrow that much. But we do wanna have a high enough maximum loan amount that for folks for whom it makes sense, to incorporate renewable energy - solar panels or geothermal systems, for example, in the context of more holistic home energy retrofits. That those can be financed or at least substantially financed with a PowerSaver loan. So that's the maximum eligible loan amount, not necessarily what we think the average will be, but that's as high as we go.
The loan terms - and this is really important. We felt like it's really important to align the term of financing with roughly what we think the useful life and tangible benefit of the retrofit improvements will be. Now that really differs, depending on what kind of retrofit improvement you make to your house so there's no sort of perfect way to do it unless you literally adjust every loan by every scope of work, which wouldn't make much sense for FHA or for lenders.
So what we say is that for most of the eligible retrofit improvements, that the PowerSaver loan can finance, the term is 15 years. For those larger ones particularly related to renewable energy, the term can be as long as 20. Now there's some important underwriting and credit criteria in PowerSaver that we have put in place because with so many families struggling financially with millions of Americans dealing with the situation of having an underwater mortgage, that's where the outstanding debt on your home mortgage loan is actually greater than the value of your house, that it's really important that PowerSaver loans are not marketed or offered to homeowners that are not going to be in a position to take on even a relatively modest additional amount of debt to finance a retrofit.
So there is a limit on the total amount of loans relative to the value of a home that borrowers can have. So that's 100 percent, which means that with the PowerSaver loan and any other mortgage debt that you have, you can't be in an underwater position at the time you get the PowerSaver loan. It's also gonna be important that we get a sense of the value of the home. That's how we can ensure that we don't go above that 100 percent combined loan-to-value ratio. So there will be a requirement for an appraisal or other FHA-approved method to determine the value of the home today before you get the retrofit.
The next slide shows you some features of the program related to eligible homes. I think just in a nutshell I'll say that generally speaking, PowerSaver is for single-family, detached, owner-occupied homes. Now that can be an area where we get a lot of comment that raises ideas for expanding to a broader range of property types. FHA is part of the administration commitment to really sealing up retrofits in the single-family home market. So at the pilot stage anyway, it was important for PowerSaver to be focused on single-family homes. There's certainly a huge need and opportunity for retrofit in other properties, including multi-family housing. We are addressing those at HUD and DOE and the federal government through some other initiatives.
Also here at the bottom you see some important credit criteria. We felt like for PowerSaver loans at the pilot stage, not only do we want to make sure that families are not underwater with respect to their home mortgage, but also have solid - not necessarily perfect or outstanding - credit score, at least have a pretty solid credit score. So that minimum decision score you see there, 650, that refers to the FICO score, which if you've been in the home market recently, you probably know what your own is. Six-fifty would reflect folks with pretty solid credit, but certainly enable PowerSaver to be available to a substantial number of homeowners.
We also want to make sure that people don't have too much overall personal debt, and so there's a maximum debt-to-income ratio that you see there is 45 percent. A feature we just want to apply here, just to turn to some questions in a minute, is the use of proceeds. Under the Title I program today, you can make almost any type of a home improvement, but PowerSaver is really designed for home energy improvement. So we work very closely with the Department of Energy to develop a fairly extensive list of improvements to a home that we know will directly lead to better energy performance, energy savings and economic savings over time for families. Those improvements are all listed in specific detail in materials that I'm gonna show you links to get to in just a second.
But they include the basic kind of bread-and-butter weatherization improvements like weather stripping and sealing. They include more expansive kinds of measures like additional insulation, HVAC or furnace replacement, and as we've mentioned, they also include certain types of renewable energy improvements. So it's a very wide-ranging list. It is not necessarily set in stone. It's another area where comments from the public might be able to add to the list of eligible measures. But the important thing is they really do have to be related to improving the home's energy performance because that's what this program is all about.
I've mentioned liquidity a couple of times. For those who may know, HUD programs are for the mortgage market a bit. One of the options that we will be working on is to go through Ginny Mae which is the financing arm of HUD and offers a guarantee of securities that are back by FHA insured loans. And our colleagues at Ginny Mae are very eager to work with FHA to come up with a potential way for Ginny Mae securitization to be an option - one option for liquidity in the marketplace. That's not necessarily going to be the only option for liquidity, and we think over the next several weeks we'll be able to help identify additional ways that we can provide additional liquidity for lenders to make more PowerSaver loans.
So we're just about to wrap up here. Let me just touch briefly on a couple of last important features. I mentioned the importance of focusing PowerSaver loans on communities where they've already started to take the affirmative steps to encourage retrofits, where we've seen consumer interest and local civic leadership to really encourage home energy performance. So one of the ways that we'll be able to get a good sense of that is any of the communities that are already participating in DOE's Better Buildings program will automatically be eligible.
See, these are a number of states and regions and cities that with DOE's help and support have already taken a number of steps to put together comprehensive retrofit programs. So all of those communities, for sure, will be eligible - assuming a participating lender is able to serve them to access a PowerSaver loan. But those won't be the only places. We definitely recognize that there were a number of other places that were not part of the Better Buildings program that are also doing a lot of good things to promote home energy efficiency. And so if a lender that applies to participate says they would like to serve such a community, we will work with DOE to make an assessment that, in fact, the conditions are good there to make this financing available. And on that basis, it should be.
So we really do expect the PowerSaver loans will be available in all kinds of communities - urban, rural and suburban - in all parts of the country because we've seen the amazing momentum and enthusiasm around home energy efficiency everywhere. So whether you're a lender or whether you might live in a community that would like to see a lender make PowerSaver loans available, this is the most important slide. This outlines some of the basic criteria that lenders will need to meet in order to participate in the program. There are some core elements that I mentioned, including approval as an FHA Title I lender, but then what we'll really be focusing on is this statement of expression to participate from lenders.
What we really want to have a conversation with lenders is about they envision using the PowerSaver program, their business model, the market they want to focus on, the capacity and experience they have to work in partnership with cities and utilities and contractors and other organizations that are all gonna be part of a holistic retrofit system. So we'll really be interested to hear from lenders how they think they're gonna use the FHA guarantee to make loans to encourage home energy efficiency. We think that will be a very constructive and robust process. We don't expect every lender will do it the same way, just like we don't expect all lending institutions to be the same kind of lenders.
We suspect that there will be different ways and methods of delivering PowerSaver loans to communities, and we're really interested in seeing a variety as far as the pilot program. This slide, which folks can look at after the call, has links to really everything you'd ever want to know about this program at this stage, including some additional background material and frequently-asked questions. The federal register notice, that's the publication that all federal rules have to come out in. That has all the detail on PowerSaver, including what lenders need to do to express interest in participating.
We've also got a link here to some information on the Title I program that's the basis for PowerSaver and a link to DOE's better buildings program. There's also contact information here at FHA for folks who have questions, and I might have skipped past it. There is also an e-mail address where lender solicitation of interest as well as public comment can be sent. There it is, at the bottom of this screen, firstname.lastname@example.org. So that is an awful lot of material to go through on the phone. I'm sure we've got lots of questions. Let me just say before we open it up, two things.
One, this Power Point presentation is really for your all's use on the call. Highlights of it will continue to evolve as we add additional features reflecting the program. So do check back if you're interested in the program regularly through the HUD Web site where additional information will continually be provided. And second, on this call today and starting now, I hope we're gonna have a good conversation. But for anyone who really is interested in following up more who might have a lender in their community or might work for a lending institution and would like to really get into some details around specific ways that a PowerSaver program could work, we're looking forward to doing that.
So this is not anyone's only chance, by any stretch of the imagination, to ask questions or talk through the program with us and we hope people understood that we'd have a chance to follow up with you. So why don't I stop there and Jennifer or someone coordinating the call - I don't know if there is a process for questions or if we're just kinda of gonna take them as they come. So we see now that a number of questions have come in via e-mail, which is great. So we're scrolling through this here and I'm gonna start at the beginning. It looks like there are a lot, so we'll do our best to answer them all as we go here. There are an awful lot which is great. We love the interest.
Okay, the first question is do I need a microphone. I don't think so. Hopefully not. Okay, here we go. The first question looks like it's coming from Kate. "Is PowerSaver the same as Home Star?" No, PowerSaver is a different program from Home Star. Home Star is proposal of the administration that we very much hope Congress will pass that would provide a rebate to homeowners for home energy improvement. If Home Star is passed, which we sincerely hope it will be, it will be a great compliment to the PowerSaver program and a number of the other finance initiatives that HUD and DOE are working with communities to create.
The next question is, "Will these slides be made available on the Webinar?" Yes, as I mentioned, keep in regular touch because they might well be updated. The next question is, "Is there a program for multi-family dwellings?" That's a great question. PowerSaver, as I mentioned, is limited to single-family homes because that's been an important area of focus for the administration where there's been real challenges to getting market-based solutions. At HUD, and I think working with DOE, we will be now increasingly focused on opportunities to retrofit multi-family properties. We've done a lot together with the two agencies to promote the weatherization of multi-family buildings with the federal weatherization program, and through a number of other initiatives. But PowerSaver is a single-family program.
"Can communities other than those in the notice be involved in the pilot?" Yes. I think we've discussed that. Another question about the availability of the presentation. Another question about multi-family. This question says, "What about the fact that the majority of low and limited-income people living in HUD housing have no investment capital to begin with? Wouldn't this potentially jeopardize already vulnerable mortgages?" This is a really good question. I think I got at this when we discussed some of the underwriting criteria, the minimum credit score, the maximum loan-to-value, the effort that we're going to be making to ensure that lenders only provide loans to homeowners who can afford to take them on. But it's a really important feature of PowerSaver.
The next question is from Andre. "If the PowerSaver loans are always in second position, does that mean that homes in the 80/10 or 80/15 financing mix would not be eligible?" Not necessarily. I think again, there are some - there are a number of homes that do not have an existing mortgage. In those cases, the PowerSaver loan would be the only mortgage. Obviously a lot of homes do have a first mortgage, and in those situations, PowerSaver loans would have to be in second position. PowerSaver loans could not be in third or fourth position, however, and that might have been where that question was coming from.
Question from Kate. "Are there federal or state tax credits for these improvements?" There certainly are a lot of federal and state credits, depending on where you live. We expect that many homeowners who are doing more holistic retrofits might combine PowerSaver financing with some of the state and local credits. We can send around - DOE's got some great resources on the state and local credits that are available. Here's a question, "Does the second position mean that if there is an exiting key lock or other second then you are not eligible." That would generally be correct. The loan under PowerSaver has to be in second position.
And then here is a second question from the same person. "Are there any unsecured options?" So this is a really good question and an important point of the program. We have designed PowerSaver to work primarily as a mortgage product. FHA is in the mortgage business. We insure home mortgage loans, so that is really the primary focus and intent of the PowerSaver program. There is a feature, though, of Title I insurance that is also applicable to PowerSaver. That if the home energy PowerSaver loan is less than $7,500.00, the lender is not required by FHA to secure it with a mortgage or a deed.
So in other words, if it's less than $7,500.00, it could - it doesn't have to be, but it could be available at your lender's discretion on an unsecured basis. I think we'll learn more as lenders express interest in participating and we receive public comment about the extent to which that option may be one that some lenders want to take. So the answer is yeah, there is an unsecured option, but whether it's going to be a major part of the program will really rely on what lenders - how lenders decide to develop the different lines.
This question is from Ken. "Do you currently have a map of areas to be involved in the pilot program?" As we discussed, and I want to make sure everybody is clear, there are no expressed limitations per se on where the program could be available. We just want to be looking to see that there is some evidence of local and definite momentum around home energy improvements. There is a map and list at the DOE Web site on the second-to-last slide in this presentation to the communities that I mentioned that are automatically eligible as part of DOE's Better Buildings program.
Next question. "How do we find out what lenders in our region are already Title I, Title II approved? Is there a way to also see how much in loans they have underwritten?" FHA can provide information on approved lenders and we will get a link out, which we will post on the part of the HUD Web site that links from here all the information on the PowerSaver program. The next question says, "Is there a definition of home energy improvement?" Yes. We've talked about that.
Next question from Dallas, "How many lenders have shown interest in offering PowerSaver loans already?" We actually just announced this program two days ago. We were honored to be part of an event the Vice President hosted at the White House with Secretary Chu, Secretary Solis and our Secretary Donovan, so we are just now, this is the first Webinar and we are just now started to solicit interest from lenders.
Here's a question from Nicole. "May we use SEP - state energy program - funds to support the loan insurance?" So this is a really good question. There are a number of ways in which it might be possible for DOE grantees, Better Buildings communities, states that have a state energy program resources, to augment the financing that's provided by the PowerSaver loan. And there could be ways that state and local funds could also work in conjunction with the loan insurance and serve to mitigate the risk that lenders have to bear in making PowerSaver loans. Without knowing a specific kind of structure that you might have in mind, I think I'll leave the answer there, but we are gonna be very interested in talking to lenders as well as their partners in communities about ways that other resources, including DOE funds, can be utilized in combination or in concert with PowerSaver.
The next question is on a similar vein. "Can we use the SEP funds to cover the one percent insurance premium charged to lenders on this loan?" We will have to check that. That I'm not sure of. The answer is maybe. This next question is from Tom. "If 90 percent guarantee is a good policy for energy improvement financing, why isn't it a good policy for other FHA improvements?" I think the way I'd respond to that is the 90 percent maximum level of federal guarantee under this program is a statutory requirement that's been part of the Title I program since it was created in the 30's. Obviously, the other FHA programs work differently.
Here's a question. "What happens to a household in case of default?" I'm not sure. I guess the question is sort of how the process would work from FHA, but generally FHA would pursue the normal efforts to collect from a borrower in default. Practically speaking, PowerSaver loans as second liens subordinate to the first mortgage are quite likely going to be wiped out if the homeowner goes into default on their first mortgage. So there's a standard collections process that FHA follows under the Title I program and that would be the same for PowerSaver.
Here's a question. "What about the cost of an energy audit to determine the retrofit measures make sense? Could these be rolled into the loan?" So I'm glad that this question came up because I was remiss in not saying that under the PowerSaver program, a home energy audit is not explicitly required by FHA. But we strongly encourage homeowners to get an energy audit so they have the best information on what the right mix of retrofit improvements is for their house. And we think that in many of the communities where PowerSaver loans will ultimately be available, there are resources already going into either making audits free or discounting their cost substantially.
And audit, well, from a qualified professional, is a critical element to a retrofit program, and the question about whether the cost of it can be financed in the loan is one that I think we'll take under advisement. It's not currently listed as an eligible use of loan proceeds, but that could be something the FHA might consider. Here's a question about the appraisal requirement. "Isn't an exterior inspection only for an appraisal pretty risky, i.e. the condition of the building inside is just as important to refit value?"
Well, that's certainly a valid point. There's a range of property evaluation techniques that are used in residential appraisals. We need to balance the importance of ensuring that a homeowner is in a good position to take on a PowerSaver loan with the importance of making sure the transaction costs are not overly burdensome for lenders. Because if it becomes too hard for lenders to make PowerSaver loans on a reasonable, profitable basis, we're not gonna achieve the scale - it's not gonna be a widely available product or resource to consumers. So that's really the balance that we need to strike.
Here are some questions about the presentation. I think we've answered those. Okay, here's a question. Let me see if I understand. It says, "Will reduced monthly costs because of reduced energy usage be considered in the loan or will it simply be based on loan-to-value?" I think that's really getting at whether the underwriting itself reflects the potential of future energy savings, and the answer is it doesn't. We very much hope and expect that lenders will realize tangible savings on their home energy bills as the result of making improvements under PowerSaver, but the actual known underwriting is based on the other credit factors that I described.
So here's a question that asks whether PowerSaver competes with, and possibly undercuts, DOE's Better Buildings program in the 25 communities that are working on retrofit programs. We certainly don't think so. We hope it's a resource to Better Buildings. Why don't I let Bret and Brandon talk about how PowerSaver is intended to be an additional tool for a few refunded areas.
Brett: PowerSaver is just an additional tool that our Better Buildings grants can use as leverage. As we've said before, PowerSaver is one of many financing programs that can support energy efficiency. That said, we expect our Better Buildings grantees that do pursue this to put some of their money towards it, or that is certainly their option to do so. Consequently, this doesn't compete at all with the Better Buildings grantees, but rather gives them one more tool by which they can deploy their programs.
Stockton: Thanks, Bret. Now, I'm just pausing here from the screen. It looks like we've got a couple of questions that have come in through e-mail. There's a question here, "Ongoing measurement and verification is not required as part of the pilot, what will be the process for determining the success of initial projects?" This is a great question. FHA will be conducting an evaluation in real time as the PowerSaver program gets off the ground and loans are made on some of the key aspects of the program. What kinds of improvements borrowers make, what kinds of energy savings and lower energy bills result. And over time, what impact, if any, the more energy efficient features of the home have on contributing to the home's value.
So that's the aspect of the evaluation that we think is gonna be critical to really making the case, not just for PowerSaver hopefully becoming a permanent, nationally available FHA program in due time, but also for other financing options for homeowner retrofits to be developed and available by a private market. We really need to get good data on loan performance as well as home energy performance and really marry the data together so that we can get a real sense and make the strongest case for mainstream financial institutions to do this as a core business.
There is certainly a deeper level of measurement and verification, I suspect, that might have been in the question regarding the energy performance, and I think from FHA's perspective, we have to make sure we can do the kind of evaluation that gets at the financial aspects of the program and to the extent we can really have a strong energy component related to the energy performance as well. We'll certainly do our best to do it and I think that will be something that we can work closely with the DOE on.
Here's a question about appraisals. "Historically, appraisers have valued energy improvements equal to cost. How will this issue be handled?" This is a good question. So the appraisal requirements and the property evaluation will be required before the PowerSaver loan is made, and based on the condition of the home before the retrofit. So the appraisal - current appraisal methodology, I guess, is the question - suggests don't currently, for the most part get at potential value associated with more energy-efficient homes. So to the extent we can show that homes that are more energy efficient do sell for more on the market or sell more quickly, the appraisal practices may evolve in the future. But it will be conventional property evaluation made at the time that the loan is being underwritten.
Here's a question about how many homeowners have equity in their home. I don't know that number off hand, but not withstanding the terrible problem of underwater mortgages that I think currently affect something like 15 million homeowners. Fortunately, the majority of homeowners still do have equity in their home and, of course, a substantial percentage of homeowners have to mortgage at all. They own their homes outright. Here's a question on the e-mail. "Given the underwriting criteria presented, these loans will be expensive to underwrite. How long does HUD expect to make support grants available and in what amounts?"
Well, there's no question that there are transaction costs associated with these kinds of loans. The total amount of grant funding for the pilot program is $25 million. That's not a huge amount of money, and we don't know yet how many lenders will be participating. We suspect we will select a relatively small number of lenders to start and will allocate grant funds based on a number of factors, including the anticipated volume, the proposed use, the expected impact that the grant funds would have in a particular lender's program. But we do think, and we've talked extensively to different kinds of lenders around the country, that there is a viable and legitimate business opportunity for lenders to figure out how to offer this product in the market. It will certainly depend on the nature of the institution, the other business loans that they have and a whole bunch of other factors. But we are convinced that these loans can be made on a reasonably profitable basis by lenders.
Okay, here's a question. This one is a question about the $7,500 threshold for loans being secured by mortgage. I think we've answered that. Here's a question that I'll just answer superficially now, because it's quite a long answer, but "What HUD loan insurance initiatives apply to market-rate multi-family housing?" The Federal Housing Administration has a multi-family division that offers a number of loan insurance programs, some of which do support market-rate multi-family housing. So I'd be glad to follow up with the person who asked that and direct you to the right information on multi-family.
Question from Steve, "Does the loan have to be paid off when the home is sold?" Yes, so PowerSaver loans are mortgages. They will be required to be paid off. That is an important feature of the program. Here's a question from Eric. "Does PowerSaver require a post-insulation appraisal? What, typically, are the costs and is there a network of appraisers certified to appraise them?" No, we will not require an appraisal after the retrofit is done - after the homeowner has made the retrofit improvement to their home. There is a required inspection, however., to ensure that improvements were made and done to the satisfaction of the homeowner.
The next question asks, "Does the first mortgage, if there is a first mortgage, have to be an FHA-insured mortgage?" The answer is no. Question from Todd. "Down the road, do you see a program like this being available to small, commercial businesses?" They're typically not a target market for utility finance programs. That sounds like a market area or a product type that would not necessarily be in HUD or FHA's area. We're really housing focused. But I think it could be potentially something, maybe, that DOE or SBA programs were addressing. I don't know if anybody from DOE wants to â€"
Brett: You know, depending on the success of this, this is definitely something that we could look at in the future. But I think right now the focus is on making PowerSaver a success.
Stockton: Great. Thanks, Bret. Next question, "Estimated interest rates?" Great question. It's hard to tell because rates are ultimately not set by FHA, but sort of determined by lenders and market conditions. The goal of this program, to be very clear, and with the incentives and changes that we have made is to offer financing that is affordable to most consumers and that is value-added in their marketplace. So whether we get there will depend largely on the lending partner and the market and the consumer. We feel confident that for the market we're hoping to help serve with PowerSaver, a number of homeowners will find the PowerSaver loan to be the most affordable and the best option for them.
But certainly, in a number of communities there are gonna be other financing tools available and if those are more appropriate or more viable for certain consumers, they will make that decision based on what's best for them. The next question is "What is FHA's target size of total portfolio for the pilot?" So there's no limit on the amount of loans or lending that FHA can insure under the PowerSaver program. We did estimate, as part of our internal modeling, that we might see something like $300 million of activity in the first pilot phase, but that's really just our estimate. It's not a floor or a ceiling.
The next question says, "Given the high numbers of foreclosure in the economy, won't communities with a high number of foreclosures basically be cut out of the program due to LTD?" I'm not sure. You know, the underwriting and credit criteria that we have are designed to ensure that these loans are made responsibly, but they're not necessarily, I don't imagine, going to constrain communities from being eligible. It will really be a borrower-based decision looking at their financial profile.
I think we've talked about how communities are taking steps. Some of these questions are repeating, so I'm just scrolling through here. This is a question I think I'll turn to my DOE colleagues for. "How can ARRA, that's federal recovery act funds - be distributed - no, how can recovery act funds be used to develop this program. For instance, ARA funds need to be obligated and spent by a certain time. What constitutes obligated and spent through PowerSaver?"
Brett: Sure. As far as funds being obligated and spent, funds are considered obligated for financing programs when they're committed to the program. So with the PowerSaver program, either an agreement with the lender where the lender is actually going to be the party that you're supporting with the loans, would be necessary to consider the funds obligated. To consider the funds expended, money would need to change hands, in which case, depending on the exact structure of what you're doing - if you're paying for the insurance premium, the ARA money would need to be paid out to the government for specific loans or to FHA for the specific loans.
If you're creating a loan/loss reserve fund for the bank, the funds must be set up and established and moved into an account for specific loans that have been made to date. And that would constitute expenditure. And that's sort of a general overview. I think depending on how the pilot lenders are selected and the structure of the programs, we're probably gonna review this on a case-by-case basis because the details, I expect, would be unique to each of the programs.
Stockton: Thanks, Bret. Let's see. It looks like these questions are now repeating. Oh, maybe this is a new one. I'm not sure how these are actually being posted up here. "How does the community go about being chosen as a target market?" "Can PowerSaver be used for new construction?" Okay, those are two different questions. So the first one is about the target markets. I think we talked about this a little bit. It's really gonna be up to lenders to decide where they would offer PowerSaver loans. I think we've talked enough about sort of generally how we want to see communities in position to be good markets for lenders to serve fro the pilot program.
I would say that if anyone is in a community that might like to see PowerSaver as an option, it would be important to encourage lending institutions that serve your area to take a look at participating in the program. We'll then have to make a decision, a determination of how many lenders we will approve to participate. But we certainly hope to be able to have PowerSaver loans widely available in as many markets as possible. We are doing - we'll make sure everybody on this call gets an e-mail. We are doing some presentations similar to this one for lenders on November 16 and November 30. There will probably be some other informational calls as well.
As we mentioned, the Power Point has a link where people can make comments or ask questions directly to FHA. I think the other part of this question was whether PowerSaver loans can be used for new construction. And the answer is no, these are for property improvements. Okay, here's a question from Eric. "How does the PowerSaver loan program plan to work with and/or compliment existing utility DSM rebate and efficiency programs?"
That's a really good question. We'll certainly be very interested in lenders that apply to participate and express a real willingness and ability to partner with utilities and state and local agencies and non-profits and private sector organizations that are all critical parts of a comprehensive retrofit program. So we would see the potential to be quite strong for a lot of complementarity and synergy between demand-side management, rebate tax incentive programs, and PowerSaver loans.
The next question says, "How is it different than PACE?" This has come up a couple of times, I guess, indirectly. Generally, PACE, which I should say for folks who may not know, stands for Property Assessed Clean Energy, which is a form of financing that the administration also supports in which home energy retrofit financing is paid back over time through a gradual increased assessment of the homeowners property tax. PACE assessments are typically placed in a senior position to the existing first mortgage, so that's one big difference between the PACE programs and PowerSaver.
PowerSaver, as we've said, is always in a second position if there is a first mortgage. PACE assessments are also, as the name suggests, they're tax assessments. They're really not mortgage loan programs. That's another difference between PACE and PowerSaver. As important as the differences, I think there are some important similarities, too, in that while the PACE program has experienced its difficulties with concerns expressed by independent financial regulators, a lot of the communities that we think really have got very promising momentum and have put other important program features in place to encourage and scale up home energy retrofits, were looking at or planning to use PACE financing, and whether those communities are able to do that, we hope that the PowerSaver option will be potentially appealing and compliment other kinds of financing, including unsecured loans, utility-owned bill programs where they're available, revolving loans funds and other ways that homeowner-direct financing is getting to market.
I think there's no question that what Bret said is absolutely true. There's not gonna be any one way to provide financing to every type of homeowner and every kind of house for home energy improvement. So from the federal government's perspective, we think it's important to offer a set of tools that communities and consumers can choose from and make that decision for their particular needs. This next question is, "How many households do you project can actually qualify for the loans considering the equity position and the drop in home values?" I'm not sure we know how large this market may be, because as a pilot program, PowerSaver is going to be available only in certain places to start.
We'll have an idea of the market, I think, when we know who the lenders and the eligible communities in the pilot are. But again, not withstanding the very difficult environment and the challenges that a number of homeowners and consumers are facing, we do think that there are a large number of homeowners for whom PowerSaver would be an appealing and available option. The next question, "How many loans annually are Title I loans?" We'll double check, but the number is quite small - less than 10,000 under the Title I property improvement program currently.
I think we've talked about the size of the program we anticipate. There's a question about the $25 million in grant funds and I do want to emphasize that's not the overall amount of financing or total amount of lending that we can support, that is just the amount of appropriated grant funds that are available at the outset of this program to lower cost to lenders and consumers as the program gets off the ground. There a next question about "How much is available in grant funds to lenders?" I think we've addressed that. We really will assign the grant funds to the lenders based on their programs. We intent to pay a maximum grant of $5 million. That number could change. It really will depend, I think, on what lenders step forward and express interest and what their particular needs and proposed uses and benefits that they would deliver with the grant funds would be.
The next question is, "How will FHA or lenders demonstrate savings without an audit?" How do account for regional behavioral variability. I think we've mentioned that these audits are very important. We want to encourage them. We expect the large majority of PowerSaver participants will be using and benefitting from an audit. The underwriting of the loan, as we've also described, is not based on the audit, but the audit is a critical tool for the consumer to get the most and best information on what set of energy improvements make the most sense for their home.
Here's a question about "How will HUD be doing the evaluation, particularly with respect to the energy savings?" Will FHA be working with utilities?" We're still designing the evaluation protocol for the program, but we hope we will be able to work with utilities and local communities and others to make sure that we can get at all the data that we think will be important and that we think would be very good data on loan performance, energy savings and property value.
This is a question, really, regarding eligible improvements. "How will you decide which kinds of renewable improvements are eligible?" I think that's addressed in the list of improvements and again we are open for public comment on whether their should be other measures included on that list. It looks like we're wrapping up our time. Let me just see - it looks like there's still a few more questions we'll try to get to. For anyone who's got one that maybe didn't come through the system or that we didn't have time to answer, please do follow up with us at the e-mail address in this Power Point presentation. We'd be delighted to take questions and have further conversations with anyone who's interested.
"HUD and DOE were very instrumental in promoting and supporting PACE. Do HUD and DOE still fully support PACE?" I'll let my DOE colleagues jump in here, but the administration, which includes our agencies and others absolutely still supports an appropriate PACE pilot concept and to the extent there are opportunities to explore that that address the concerns that have been raised, we will continue to be interested in working with local communities. There are some around the country who are still working at PACE and trying to structure it in a way that does not raise some of the concerns that the earlier forms of PACE financing did.
I think that's gonna be the last question. We're just about out of time. I really appreciate everyone's interest in this. I hope this presentation was useful and will at least get you started. The information on HUD's Web site has a lot more detail. There's some frequently asked questions and some fact sheets as well as the full-blown program description in the federal register notice. And of course, we're always available to take any questions or comments that we hope many of you will have in the next several weeks. So I guess Jennifer and to all, the HUD and DOE folks will sign off and we will look forward to continuing the conversation with anyone who's interested.