EECBG Strategies and Considerations Approaching Lenders Webcast (Text Version)
Below is a text version of the December 3, 2009 What Drives Consumer Borrowing for Energy Efficiency?
Announcer: Matthew Brown
Good morning, this is Matthew Brown. I am pleased to welcome you to the 3rd in a series of Webinars that the US Department of Energy is putting on. This webinar is going to be focused on strategies and methods for working with and developing partnerships with lenders. We are very pleased to welcome all of the participants to this. We've got a very interesting set of panelists who will be presenting. Our goal for this presentation is to provide the participants on this call with a set of perspectives on how they might approach and work with lenders. The idea though is to _____ emphasize the importance the Department of Energy is placing on leverage and on working with the private sector and private sector lenders; in order to leverage up the funding that is available through the federal stimulus EECBG _____ funds. What we have done is we've put together a set of three panelists each of whom represent different sectors of the lending industry. One of the first things that I think a lot of people will become aware of is the fact that although it isâ€¦.some people might tend to think of lenders as a relatively ________ group. They are in fact; there is a lot of diversity within the lending industry. We have put together a panel that includes both a lender who is highly specialized in energy efficiency lending and is built a successful business in PA, in CT and a number of other states in lending for small energy efficiency loans. We have a lender who is what we call a CFDI (Community Financial Institution) lender who is based in Portland, Oregon working with the city of Portland in a partnership for energy efficiency lending program. Finally, we have Steven _______ who is with the Bank of Colorado which is a community bank highly focused on energy efficiency mortgages and Energy Star mortgages and mortgage lending. So the presentation that we have provides some good diversity in that way.
What I would like to do first of all is introduce Peter Krajsa. Peter is the Chairman and CEO of AFC First Financial which is a national specialty energy efficiency lender. It's been around since 1947. Peter has 25 years of experience in consumer lending mortgage banking and was responsible for the creation of AFC First National Energy Loan Program and the Keystone Home Energy Program which is run in cooperation with the Pennsylvania Treasury Department. He's second generation, owner of AFC First and also principal of Franklin Acquisition of Advisors. I think Peter has been personally somebody I've had the opportunity to work with quite a bit for quite some time now, is very expert in all of this and very interested to hear what Peter's perspectives and thank you Peter very much for taking the time to present, so let me turn it over to you Peter.
Next Slide: AFC First- A National Leader in Energy Efficiency Lending
Thank You, Matthew and greetings from Allentown, PA which isâ€¦.President's coming here tomorrow so hopefully we will erase 20 years of mis numbers caused by Billy Joel, and we'll just move on from there about the area but if you could move on to the next slide ,Scott please? The AFC First very briefly as Matthew described is my family's business started in 1947. We specialize really in nothing but energy efficiency lending for the last 10 years. We are one of three Fannie Mae approved energy lender's in the country. Right now we work in about 20 states through a network of over 2,000 contractors, manufacturers, utilities and some state and municipal partners. We have the capability to lend nationally with our NOVA/Great Bear Bank platform.
We do several services as part of our package, I guess of services, and that's really focusing on contractor recruitment, screening them for _____ and ethical stability and also training contractors and ______ implement programs. We provide the loan application intake and processing primarily for consumer energy loans; we do the loan servicing. To date, mostly on _____ finance program so we are working to on bill programs and we make payments to approved contractors upon satisfaction of completionâ€¦.satisfactory completion of the measure. We also integrate all the energy savings tracking, working with programs like PSD's Green Energy Compass so we try to provide the _______ package of ... for small energy efficiency finance.
Matthew mention we developed the Keystone HELP program which we will talk about a little bit later is a ______ program in Pennsylvania. We also started Connecticut's solar leasing program for consumers in cooperation with the Connecticut clean energy fund, run programs for a number of utilities but really our focus is on simple contractor driven residential energy efficient programs. I'll emphasize more later what I mean by contractor driven.
Next Slide: The Facts about Financing
So here we are right now in the perfect storm of energy crisis and credit crisis and consumers really are caught in the middle. You have the need for simple financing program implement a lot of these items that we are talking about in going forward to impact your own personal energy efficiency. I'm a good example; my electric bill is going to be going up 38% in January. With my utility which has been, had____ caps up until now so I have a definite motivation as a consumer to make these moves.
I did hear one interesting analogy the other day about energy efficiency and consumer's desire to move ahead, it was equated to a colonoscopy; something that you needâ€¦..you have to get done but you really don't want to do it. So I think that's how a lot of consumers really do view this, despite, I think our best intentions.
Finance is a big portion of this that's 70% of all home improvements are financed one way or another and if you get about 15,000, pretty much all home improvements are financed.
Most consumers really are motivated by necessity when it comes to energy efficiency, that's reacting to a broken furnace. Another problem, they aren't motivated to go out and actually embrace this because it's not going to Hawaii, it's not paying for college, it's not something fun. That's that "Reactive" market is 90% of the market and you can't really ignore it just by focusing on the "Proactive" market. That being the consumer that really wants to go out and do this. That market's growing but there aren't the contractor currently or the auditor base really to support this fast growing market. So I think any program that somebody puts together has to address both this "Reactive" and "Proactive" market.
The goal is to keep it simple for the contractor and consumer and remember the goal is for work performed and the energy savings not the number of audits conducted.
Next Slide: What Has Worked and Where the Jury is Still Out
So here's what's worked and where the jury is still out from what we've seen. Again, we're on the ______ with these programs operating programs primarily for residential, single family, owner occupied energy retrofits for heating, cooling, insulation home performance.
We've seen the most successful programs that you may have heard about are the program that are run by NY- by NYSERDA, our Keystone HELP program, Solar Leasing, other programs where they're contractor driven. That's where the volume's really been the greatest.
On-Bill is a very hot buzz word but I've beenâ€¦.there's been some minor programs with some success here but there's no real track record. From the lenders perspective you have concerns about increased delinquency when you're turning over your loan servicing to utility who takes the credit risk. There's several issues there, good concept that has to be looked at more realistically. This whole real estate tax model, the Pace model is an interesting concept again but it's a highly localized program that can only address a small part of the market that's that "Proactive" consumer. So again, a nice piece of the puzzle, but not necessarily the solution for everything.
My current concern which I think, I hope, is gonna be rectified shortly is the impact of Davis Bacon on any kind of residential loan program. As we understand the situation right now any _____ money is required to be tied in prevailing wage in Davis Bacon and that's really gonna ultimately exclude the small business and minority contractors who do most of the business in small residential energy efficiency. I'm hoping that there's some consideration there that will modify that approach when you're talking about using _____ money for lost reserves or rate _____ downs or other things that aren't impacting the contract directly for merely financial mechanisms.
Next Slide: A Successful Consumer Energy Efficiency Program
So I think a successful program does a couple things, it assists consumers obviously in making better decisions regarding their energy efficiency by providing affordable monthly payments. That's what drives these largely kinds of improvements now. It's all about; almost like buying a car when you're talking about 7 or 8 or $10,000 kind of items. How am I going to pay for it?
It really trains contractors and gets the right kind of contractors in a program on how to utilize the program and educates them on how to sell utilizing special financing to promote higher efficiency.
State of the art technology customer servers are important ingredients. It's not something where you can say, hey walk into your local bank or credit union and expect to have somebody there be knowledgeable. Now we have on this call some very specific community banks that have specific knowledge in programs. But on the general scope most branches of community banks or large national banks don't have the focus knowledge.
You want to have consume knowledgeable, personal servers and customer service and ultimately you want to have special financing that's different and provides consumers with a greater incentive than what they can get from a traditional financial product.
Next Slide: How Do Americans Pay to Improve Their Homes' Energy Efficiency?
So how do Americans pay to improve their homes' energy efficiency overall?
Next Slide: Two Types of Energy Efficiency Customers
Two kinds of consumers that I think really make up the market place and that's the "Reactive" consumer and....forgive me office viewers, but the deprived consumer; will have a very different motivation on how they're gonna proceed.
Next Slide: Reactive Consumer-Welcome to the "Twilight Zone"
The "Reactive" consumer is what I call the financing Twilight Zone, it's that number between 3 and 15 thousand that's too big to put on a credit card for most people and really too small to go out and get a home equity loan.
It's really the vast majority of energy efficiency improvements.
Consumers don't want a lien on their home for this small amount. It's really time sensitive, the consumer needs to work done right away; primarily contractor driven.
"Come-on" or "Teaser" financing that might be offered by a big box store or manufacturer which would be zero percent for six months and then 32% thereafter. It's really not the answer for major capitals purchase that can really hurt the contractor's credibility if he ends with consumers that end up in higher interest rates.
The borrower wants a longer term so they have lower payments or a lower rate than they can get from a traditional bank product. That's why they're looking; that's why they're being incented to do this. The quick solution is really a simple unsecured point of purchase loan program with lower rates based on simple product qualification such as an Energy Star standard. Very important we want to adhere to national standards make it simple for the consumer and contractor to embrace.
Next Slide: The "Thinker"
The "Proactive" consumer is the person that I think many of us on this call are thinking about addressing, that's the person like me who's gonna see their electric bill go up 38% and what am I gonna do about it?
It's more project driven, less time sensitive, more customer thought engagement and foresight but also much smaller part of the market. If you're gonna talk about loans below $15,000 it still has the same mindset of a consumer. Make it pretty hassle-free for me, don't encumber my tax bill, don't put a lien on my property, just make it simple.
Above 15,000 people are thinking more critically how about how this could fit into a home equity loan or other products. The ____ you might want to look at the traditional "Home Performance" model, the "Home Performance's" Energy Star model that has Energy Audit incorporated and provides a lower rate or more incentivized financing than our product we just talked about before which is "Reactive" financing.
Next Slide: Program should not exclude, but Rather Incent
You gotta exclude but rather incent; so don't exclude....I'm sorry, don't exclude people but rather incent them to move up, considerate it "Tiered" Financing Approach that you can address all part of the market. Don't exclude the consumer who want to install and Energy Star heating system but doesn't have time to go through the whole protocol. Those people need assistance too but incentivize people by offering lower interest rates to move toward whole house improvements or more ______ thick improvements.
Clearly contractors are critical, they have to "buy in" to the ease of the program and be put off by complexity and they have to accommodate their customers. If the _____ is too complex they'll simply have the customer put it on their credit card.
Again use nationally recognized standards such as Energy Star, no need for space or municipalities that they do to "reinvent the wheel" or confuse the market.
Next Slide: CASE STUDY- Pennsylvania's Keystone HELP®
Let me give you a quick example of Pennsylvania's program which was started prior to all the ___funding. Three years ago we started a _____utility the West Penn Power Sustainability Energy Fund to offer lower rates for high efficiency improvements.
In their very innovative approach the Pennsylvania Treasury Department got involved and said they wanted to provide the core capital for this loan program and take it state-wide so they put in an investment pool of $20 million in lower cost funding which we were able then to pass on the lower cost to consumers.
It's been a really and excellent success, over 5,000 loans and nearly $30 million funded in the first three years. We are really only constrained by the amount of capital that we have available to us and complete state-wide approach.
We ____that program by coupling the Pennsylvania Housing Finance Agency with the Treasury Department that has ________ _______ like in most states specializes in low-income loans. In Pennsylvania they have a great product that allows people to make renovation/repair loans up to $35,000. _______ _______ program, up to 120% of their home's value. We got them to make some modification to allow those loans to be used for energy related heat improvements and remove the income limit which gave us a whole broad range of loan product.
Department of Environmental Protection which is the equivalent of many state energy offices got involved last year after some legislation that was able to help expand the program by providing capital for lower rate loans and ____ ____ down as well as introduce a new rebate program.
So you have a lot of interesting ____energy's here where you have the State Treasure provide the capital and Housing Finance Agency provides some capital, the _____ _____ rate by them. Again, we administer the program.
Scott if you move on to the next slide I'll show you a little graphic here.
So as you can see on the left side, there is a core loan cap of those provided by the Treasury Department primarily as an investment. They're saying hey we can make 4 or 5% on this money and that's ok, that's better than we're making stock market last year. Recycling it's gonna come back and we can do it again.
The Housing Finance Agency has their mission which is funded by bonds. The Loss Reserve and the Rate Buydowns now are coming through the state energy office; originally, through some legislative funding but prospectively through some _____ money that's gonna be used to buy the rates down and provide the Loss Reserve that protects the Treasury Department.
We as the third party administrator do all the contractor management loan origination of loan servicing for the program; work with the network of approved contractors. We have about 1,500 approved contractors in Pennsylvania who then in turn work with the home owner and we of course interface with the home owner as well, the credit approval of loan servicing.
Next Slide: Keystone HELP® Addresses Both Reactive and Proactive
So the _____ is broken out into three components. There is a, what I call for the Reactive energy improvement, there's a low rate unsecured loan at 6.99%, 20-year fixed rate, unsecured loan; so not lien on the property, point of purchase. That rate's very, very _______ for consumers considering that the standard rate in the Fannie Mae energy loan program is about right now is about 13% so it's a significantly lower rate.
We do have a next Tier up of 5.99 for some work improvements that are a little bit more expensive in their energy savings. But if we want to push the guy; to the homeowner; to the full home house approach, we have a 4.99 rate with an energy audit credit for a complete home performance loan and then we also move into our secured loan program at that point here we can get down to as low as 3.875%. So you can see how it marches people toward making a more holistic approach and a more whole house improvement, but does not neglect the consumer that needs to make that improvement right now when it's, you know, 35 degrees here in Allentown and people need to replace their heat.
Next Slide: Three Levels of Contractors
There are three levels of contractors that we operate in. I think this is really a key concern, key component here because not all contractors are certainly created equal. In order to get engaged in any of our programs in Pennsylvania or any other state, we have a level of approved contractors where they submit an application to become approved with us for the Keystone HELP program. They have to be licensed by the state or whatever mandates your state might have but more importantly we're reviewing that contractor for financial, unethical stability. You may have great technically competent contractors but if they don't have the financial _______ to stay in business or honor their warrantees or have questionable business practices, you don't want them in your programs. So that's the baseline for everything we do is make sure they meet those guidelines. But now we want to incentivize these contractors to start looking at making greater strides into train their business into home performance businesses cause it's a big change.
Trained Contractors are contractors that have gone through a one day training that we present called Home Performance 101, just to get their feet wet basically in this home performance world and they're able to offer; some of them have lower rate loan programs.
Finally a Certified Contractor is a contractor who has gone through the whole BPI accreditation and is competent in the whole house kind of energy improvements. They have the access to all the loan programs and can do all the work, the lowest interest rates, also get the highest rankings on our websites so if somebody's doing a contractor search the certified contractor will come out first.
Again emphasizing the fact that we accommodate all borrowers, all contractors but want to incent people toward moving toward the larger whole house improvements.
Next Slide: Program Delivery
Finally at that civil program delivery, again these are point of purchase programs so there is a program website where applications are accepted online. This is a half an hour kind of turnover on consumer lending, that's what this is. Integrated applications are on the contractor website, full blown call center and toll free numbers. If you have utility participants they're linking into this program helping cross mark in this.
Whatever area or regions you're talking about you want to build this _______ because it's gonna be the contractor that drive this program, not the consumers necessarily responding to some mailing or some PSA. So you have to remember that and you want to integrate the contractors as much as you can.
Next Slide: Improvement Eligibility
Again for improvements we have really 3-Tiers; it's the Tier 1-is the Qualifying Energy Star rating Heating and Cooling and other improvements, insulation, more detailed improvements there.
Tier 2 is Advanced Performance perhaps if you have advanced performance set by the programs and then Tier 3 is if you have an energy audit involved. Typically we'll finance 75% of the work, we'll finance all of the work, at least 75% of the work is eligible improvements. So somebody's getting a new Energy Star heat pump and they have to get an air cleaner that's not Energy Star rated, we'll allow them to include that in the package.
Contractors paid upon verification of completion both written and verbal with the consumer, and we can do qualifications of improvements through AHRI certificates or the NFRC stickers for windows. You have to find some simple measureable way to verify that the improvement qualifies.
Next Slide: Keep it Simple
Finally, in my limited time here; in my entire life condensed to 12 minutes for you, please don't get caught in red tape. Energy Efficiency lending programs are competing against credit cards, that's who the competition is.
Most consumers and contractors will follow the path of least resistance even if it's more costly. So you can offer a contractor the best zero percent program in the world but if you've made it too much of a hassle for him to offer, he'll just have the consumer put it on a credit card.
Again, accomplish your goal to help consumers install energy efficiency improvements without over burdening contractors or consumers will complexity.
Next Slide: AFC First Since 1947
That's us if you need to contact us, I'm sure Matthew will be available. So that's my presentation, thank you.
Next Slide: Clean Energy Works Portland
Announcer: Matthew Brown
Who is the CEO of ShoreBank Enterprise Cascadia.? Prior to joining ShoreBank in 1995, John held 2 different positions with local initiatives support ______ ______. As program Director for _____ _____ Operations and then as a Senior Program Director for Field Strategies. Prior to that he was ______Executive Director of Capital Hill Housing.
ShoreBank is a certified non-profit community development financial institution or CDFI, which serves rural and urban communities in Oregon and Washington. Shorebanks is also a national organization as well and so you'll....John may make some reference to whether other elements of ShoreBank that operate in different parts of the country.
So John, thank you very much.
Thank you and thank you for everyone being on this call, I also want to introduce Andrea Jacob from the city of Portland. The call with us and I invite her to jump in at any point during this presentation. They are partner in this important project.
Would you move to the next slide?
Next Slide: The basic
We just start with some basics. This is a pilot effort Seeded with Recovery Act and Efficiency Block Grant resources.
It is currently aimed at single-family owner-occupied market but designed to expand quickly into additional high impact markets. We started with a very small pilot to test our assumptions at 30 units. We have done that, gotten the feedback, done some re-design and our now deploying to a 500 unit demonstration in 2010. The ultimate expectation of taking that, and the results of that and scaling into the region, with some sort of special purpose entity whose mission in life is energy efficiency.
____ slide please.
Our collaboration is large and it's I think sized not only to the opportunity but the need. First and foremost Portland has convened and lead and set the table not only within its boundaries but increasingly in the region to demonstrate how financing can move the few to _____.
Energy Trust of Oregon we won't spend a lot of time on this today but I encourage everyone on this call to learn more about this state-wide aggregator of _____ faced efficiency measures from utilities. It is, I think, one of the ingredients to scaling up and we're fortunate to have them as a partner. Ourselves, ShoreBank Enterprise Cascadia as it's been said a community development financial institution; I'll comment more on that in a minute.
Three investor-owned utilities are at the table, North West Natural, PacifiCorp, Portland General. It's an unprecedented level of collaboration and common cause we can't under estimate or understate the importance of their involvement. Not only in the marketing and penetration but in the actual delivery of the product and I'll talk about that in a moment.
Multnomah County is part of the Portland metro area. It encompasses both semi-urban and rural landscapes in the region and they're at the table....
Ooh, did I just do that?
At the start.
Should be noted that beyond CO2 the goals of this collaboration involved economic opportunity and green collared jobs work systems incorporated and is our workforce intermediaries been at the table, they won and will remain there as we grow.
In Green for All is at this table as well to ensure that these loans translate to economic opportunity among the excluded.
Next slide please.
Next Slide: What is a CDFI?
It's important, I think that our _____ understand that one pathway for jurisdiction that want to launch the kinds of products we're talking about today, to recognize that community development financial institutions are one available tool. CDFI's exist in every state and every major cities, you can learn more at CDFI.org but in essence we are not banks but we are in fact lending institutions. We are not FDIC depositories so our deposit; our capital base is not savings accounts it is government and corporate ___ private philanthropy. In our case we borrow quite a lot of money from every major financial institution in the nation as well as regional financial institutions. We borrow from major foundations like The Ford foundation and we get grant support for capital from a variety of sources public and private.
We are a $70 million organization, CDFI's range from a few million dollars to hundreds of millions of dollars so we're really just a mid-size CDFI. ______ remarkable from a replication obstacle perspective. There are many organizations just like ours around the country. Perhaps where we differentiate and use our non-profit status for is to seek outcomes from the loans we make. We consider a loan to be an output but we do consider each loan to deliver positive outcomes, and thus embrace economic opportunity, environmental quality and entrepreneurship.
Next Slide: Regional Context
Just a bit of context. We are advantaged in the region, we're very strong culture of private/public collaboration and setting the table as the city of Portland did. Our ____ was not a _____ in setting event. We have a state-wide environment policy, environment that has been helpful. More on that policy environment is available to those of you who might want it.
We're also, I think, blessed with Energy Trust as a aggregator of efficiency resources that operate on a state-wide basis or near state-wide basis. So that our thinking while Portland has lead can move beyond jurisdictional boundaries quite quickly. We ourselves ShoreBank Enterprise Cascadia are regional organizations of serving rural and urban communities in Oregon and Washington so again think we're advantaged by key partners sitting at the table that can have a conversation about scales and reach beyond jurisdictional boundaries but then have a public jurisdictional partner that gets regional thinking.
The key disadvantage is we have cheap energy in a tempered climate and it obviously affects the consumer proposition.
Next Slide: Value proposition
That proposition today is 100% financing, no out of pocket, no upfront that the energy savings is the source of the ______ of the capital required to get to greater degrees ______.
We have through Energy Trust a one-stop shop and a delivery channel. We have energy advocates that are performing audits to diligence on contractors and their work and are an incredibly effective interface between us as a fund manager and the ultimate customer.
We've provided for ____ through an on-bill repayment system that I can talk about that in just a moment.
Finally we have quality assurance and customer care programmed into the delivery system.
Next Slide: Rates and terms
Currently we have priced flexibly and in some cases dropped rates to include low-income people who would otherwise not be able to access this resource. We also incent deeper rather than more shallow work with the rate structure.
This equitable access for those who can not otherwise access credit systems for whatever reason; is one of the legs of this stool that we are building.
We are watching this pricing structure carefully, we do think that we need to probably move toward a single pricing structure and figure out other ways to achieve inclusivity, that's a core value of our program.
Next Slide: Loan mechanics (SBEC)
The mechanics are all designed to be easy, accessible, fast. We have built an IT platform that allows our loan origination systems, our underwriting platform and our loan servicing platform to talk and exchange data with the billing platforms of three _____ utilities.
The application is paper-less, the approval within about 48 hours. We are currently securing via a deed of trust but not getting things like title insurance and title reports because of the expense and the time, it's a good example of how we're balancing; achieving C02 impacts with standard credit quality. We're able to make exceptions that our more regulated environment would not be able to tolerate.
Their servicing as I said via utility bills and our IT platform collects daily from the billing platforms of these three utilities.
The product is due at sale in most cases in the interest of liquidity but we recognize in the policy environment that are exploring a meter based vehicle down the road.
To date we are averaging about $8,000 per.
Next Slide: Money flows
This is just a quick graph ____ I won't spend much time on it accept to point out that ShoreBank has a CDFI fund manager, is intermediating between the various partners and its ability to do what it does which is fund management. Really serves the interest of all three of the partners, we do what we do well. Maybe the lesson there is keeping partners that are expert in what they do in the partnership.
Next Slide: Workforce, job access, training
_______ a little bit the social outcomes beyond C02 that this collaboration was founded on and is being designed to achieve. Not unlike many people on this call, growing unemployment ______ _____ trades, typically stimulus dollars are exhausted are a growing concern. We need _____ jobs in targeted places as part of this effort that will not succeed without that ______.
Our workforce partners and a community workforce agreement documents are ______ to deliver an ______ opportunity for historically underserved populations
An ______ new partners affiliated with this whole efforts of such as unions and faith-based groups to make sure that happens.
Next Slide: Entrepreneurial Support
We're also now building a component of the effort to deliver resources to the contractor base. Existing and perspective while capital solutions and financing programs are important, perhaps even larger obstacle to scaling out and delivering this C02 impacts the nation needs.
Are the availability of specialty contractors prepared and accredited to do the work necessary with the quality required? So we are looking at not only working capital loans through our CDFI but start-up loans for women and minority owned firms that will emerge as the ____ put from this system increases and we're able to, because we are also business financer, include a business finance to build the supply of contractors as the energy efficiency product grows into the market place.
Next Slide: Thank you
This is our contact information, Derek is the Program Manager and worked for Andrea and Andrea can share her contact information as well.
Thank you. Andrea you want to add anything?
I think you did a great job John, I think the only things, you know, from the city's perspective I think all of this in the larger context _____ has a perfect kind of alignment with economic development strategy and need and then the work that we've done around energy savings for and carbon reductions and this is the financing pieces. The part that always been missing, the inclusion of the workforce development and the green jobs piece also is kind of unprecedented. We've as a region been doing energy efficiency for a very long time but now is the incorporation of this community workforce agreement and these criteria's for inclusivity and diversity in the workforce in growing that. Being adopted by Energy Trust is the state's ______ purpose fund administrator. ______ and _____ with them so, I mean, I think thoseâ€¦.that's really the big story and the exciting part about all this. It's just that perfect alignment between the workforce, the labor, the economic development energy efficiency and carbon goal.
Announcer: Matthew Brown
Well thank you very much. This terrific presentation, as a reminder to all the participants there is a Question and Answer link on the bottom right hand side of your screen. We will be attempting to answer as many of the questions as we can at the end of this presentation. After Stephen Ponce-Pore presentation so please feel free to use the...
Next Slide: The Colorado Energy Star® Mortgage
Announcer: Matthew Brown
Stephen Ponce-Pore is the Energy Program's Manager for the bank of Colorado. He is a; as a background, and interesting background in _____ mortgage banking and in energy efficiency. He worked at Applied Conservation Technology which was a structural energy conservation firm providing energy audits, energy efficient home improvements and financing.
At the beginning of his career and then began work in the mortgage banking business. At the Bank of Colorado Stephen initiated development of the Colorado Energy Star Mortgage which is a partnership with the governor's energy office and the Northern Colorado Energy Star homes program in order to provide reduced mortgage rates to home owners that renovate their home for energy efficiency. For the buyers of new Energy Star homes. So it's both new homes and renovations. He's actively involved in the development of additional loan programs for energy efficiency rebuilt energy projects.
Stephen, take it away.
Thank you, Matthew. I want to thank you for inviting me to the call and I want to thank folks at the DOE for sponsoring the call.
Yes, Bank Colorado is a relatively small community bank, approximately 35 locations in Colorado. We are in other states also known as Pinnacle Bank. We are in 6 or 7 others states as well. This program is specific to Colorado. We certainly do hope that other states will adopt it.
The _____ to the program is to provide a reduced mortgage rate to home owners that will invest in energy efficiency at the time that they are doing a first mortgage. Whether that is used for the purchase of the home or for the refinance of a property, know we can do either one. Certainly we would like to see a lot of it happening on both ends/sides.
Next, slide please.
Next Slide: Loan Products Offered
So first mortgage products ____ program _____ it was intended to strictly for the purchase of homes that have already met the Energy Star ratings. So when builders constructing the homes, he's already gone through the rating with a ____ certified rater, he's got his certification and can demonstrate that he meets the Energy Star guidelines.
As the program developed further we were able to expand it to include refinancing the home and pull money out of that refinance in order to do the energy improvements.
Certainly if you're gonna be purchasing an existing home mostly likely that home is not already Energy Star rated so we can provide the cash at that time to do the same energy improvements.
Next slide please.
Next Slide: Loan Terms
Loan terms, it's driven by the primary mortgage market so when the mortgage market improves so do the terms on loans. The neatest thing about this program is that all the mechanisms within it are already built and already exists in every state in order to support standard mortgage _____. So this is just an overlay on top of the existing mortgage market.
Loan subsidies are not graduated so there's no ____ as to your involvement in energy efficiency or renewable energy to establish the benefits. Say it's an ___ ___ ____ switch if you meet the guideline or you don't we have a matrix that can describe that. I'm not gonna go through it on this call because it is somewhat complicated but generally follows the home performance with Energy Star standards for refinances and for purchases of existing homes. Then of course if the home is already Energy Star rated and it is new construction, it by definition is gonna meet the requirements of the program.
Can be used with any first mortgage products so we're not concerned with whether it's a fixed rate or whether it's an arm. It can be a balloon; it can be FHA, conventional loan, a _ _ loan, even USDA and at times even private party loans (that is a loan that is provided strictly through the bank). Once again starting at whatever product, an interest rate is market driven and simple reducing that interest rate as a result of participation in the program, I'll have a slide that goes into that and a little more detail here in a little bit.
Driven in the same way that a standard mortgage is driven, that is income, assets, credits; the three big ones that qualify a ____to actually purchase the home are going to be the criteria under which they need to qualify for this type of loan. Once again, we are simply rolling in the additional cost of those improvements into the mortgage for which they would have already qualified. The things that changes the economics on a loan for the borrower is the fact that that loan of course is being provided at a reduced interest rate.
LTV is a; sorry I didn't define that term, for this loan to value. It's basically once again the ratio of the property value to the loan that is being obtained. In most of the world these days, it's becoming increasingly difficult to get a high loan to value loans that if a customer wants to borrow more than 80% get up into the 90/95% range. In a lot of instances that has to be done as an FHA loan these days rather than conventional loans. However, the money is still flowing and I'd like to correct that misconception right now of mortgages are still readily available. It's a little bit more difficult than it was a couple years ago however, in these economic times it can certainly can be demonstrated that guidelines were too lose a couple of years ago. That doesn't mean that they're unreasonable now and most consumers that have a good credit history and reasonable assets and income can still qualify for a mortgage loan. We can finance up to 100% of the property value on some of our programs because once again, we can work with any program that is out there. So for example, conventional loans right now have an energy efficiency mortgage that will allow you to finance not only the purchase price of the home but also energy improvements there on that can be done through an FHA product and _ _ product as well. We can finance a largely portion of a property's total value by using this product as well.
Next slide please.
Next Slide: Partnerships
A program partners I can not say enough good things about our local governor's energy office here in Colorado. They are, _____ are fabulous outfit certainly visionary and I hope they continue with that leadership rule that has been seen throughout the nation. Their primary function in our case is not only through program design but also in providing the matching finds. We'll get into the amount of those funds on a later slide.
Colorado Energy Star Homes the primary that are helping us out with promoting the product which for those people that are gonna program developers that are on this call, I do want to put in a plug for in any program that you design the financing has to be taken care of and that is a very important component. But please do allow room in the design of the program for promotion. It's simply a sales out here if the consumer doesn't know about the product they won't use it. I think we have a fabulous product to this point, certainly our next hurdle is to promote the product and make sure that everybody from our program partners and contractors and fellow bankers are aware of it, realtors, etc.
That is our primary job is making those connections so as I mentioned realtors, especially the eco-brokers; that is ____ ____ there is an existing group of brokers out there that want to focus on energy efficient homes. Leveraging that source for advertising, for promoting program is very important. Local contractors, as Matthew mentioned in my introduction there, I used to be one of those contractors, running a small firm doing structural energy, conservation.
I have got to take my hat off to Peter and the program that you designed there, having a rapidly available product is extremely important. Mortgage often times is not that product so those people are, needs-driven that is the furnace is broken are they're gonna replace it, this is probably not the ideal program for them because they are gonna need to do that repair long before they're gonna be able to get a mortgage. Mortgage these days because of some new regulations in place is typically taking 3-4 weeks to close on that mortgage. However, the benefits of the mortgage are extreme. The interest rates these days ___ in the low interest rate environment of most conventional as well as the government loans, ____ about a 4.75, 4.875% interest rate. We are genuinely at the, some of the lowest interest rates that we've seen in the history of our nation. By the time we stack on what is typical for a home owner of having the mortgage interest that is paid each year taken away from that start point of 4.875 maybe you're gonna see a reduction in that effective interest rate down into the 3% range; 3.25% range after taxes.
Once again and extremely low interest rate overall long-term and that combination of low interest rate and long-term leads to monthly payments that are very affordable for the customer and many, many cases the energy savings and the mortgage savings that result from that can actually end up paying for the improvements such that, they're able to do the improvements to the home and not actually have to be spending more per month on their bills, they're actually spending less per month on bills. So one of the criticisms of energy efficiency measures for a long time has been, "Yes what's the pay back on that"? Generally speaking meaning, when do I get my money back for the investment but we're going a step further here by saying what is the actually problem? Most consumers already have the desire to make their home more energy efficient, they have the desire to live in a more valuable, more comfortable home. What they're lacking is the ability to pay a higher bill month to month and this program can remove that.
Obviously you need to partner with your local utility __ primarily in terms of promoting the product and making sure that everyone knows that it is available. Of course your builders; especially those builders that are the green builders, the Energy Star builders. Get them involved and make sure that they know about the program. The benefit provided through this program is typically larger than a lot of the builders can offer even on their own product.
Next slide please.
Next Slide: Mortgage Loan Economics
Mortgage loan economics that is, what is happening with banking industry. It's important to note that when a bank gets involved in a program like this in order to provide an incentive, chances are they are taking a financial hit in order to do that. On a normal loan we just do a standard mortgage loan from most the industry the gross income on that loan is gonna be about 2% of the mortgage amount. In this case we are providing incentive is, we're _____ out the income to the bank by half of a percentage point on a loan. They actually looked nation-wide at the level of incentives that are being provided that half point reduction in our fee is substantial and in fact the only way that the bank can continue to offer a product like this is by ___ a lot of the loans that we are fresh out of the box, this is a pilot program at this point. We have high hopes to see this loan product being used to great advantage throughout the state and therefore making up on volume what we have lost in income per loan.
Next slide please.
Next Slide: ENERGY STAR Mortgage Example
Ok, here's the example I put in and this is...I'm gonna spend a little bit of time on this and that is a _____ program. Let's look at a loan of $200,000.00, on a 5% interest rate on a 30 year term. The monthly payment on that works out to $1,073.00 per month. That's just principal and interest, we're not gonna play with taxes and insurance right here in that they're somewhat irrelevant what we're doing at this time.
The Energy Star Mortgage can be used to buy down the interest rate, now the amount of the benefit of the Energy Star Mortgage is 1% of the loan amount. That is half of the percent of that loan amount is coming in incentive from the Bank of Colorado, half a percent is coming from the governor's energy office. For example, on our $200,000.00 loan the incentive being provided by our local governor's energy office is $1,000.00. The Bank of Colorado was matching that $1,000.00 by reducing our interest rate; that is the dollar equivalent of that and that's what yields a lower interest rate on the loan. It's essentially being used to purchase a lower interest rate on that loan. The amount of that lower interest rate can fluctuate according to the market so I used the example here of one point in discount buying a quarter point lower in interest rate yielding; an interest rate of 4.75%. That can be larger or smaller depending upon the day, frankly a quarter point is relatively small ____I went to the _____ the smaller side on this example. Usually we would expect that to be a similar between a quarter to a half a point reduction in interest rate. But even if I take this rather pessimistic view on it that lowers monthly payment to a $1,043.00 for the mortgage payments, so this saves $30 a month on a mortgage. If we look at somewhat typical utility bill for Colorado _____ it's gonna be $130.00 per month. We have relatively low utility rates here in Colorado. In an Energy Star home most often we're gonna see a reduction that bills somewhere on the 30% mark, so that saves another $39.00 per month. ___ ___ becomes a simple calculation of at current market interest rates if we're saving $69.00 per month between the mortgage and the energy savings. How much of that is actually financed? If you run the numbers out, you find out that's $13,000.00 that can be financed at the exact same monthly payments that is if you combine the mortgage payment with the utility payment before the improvements verses after the improvements. You can spend $13,000.00 and the customer's not had to open their wallet at all. As Peter mentioned for us earlier vast majority of customers aren't gonna spend much more than $15,000.00 in order to do the improvements. There are a few of them might have to spend more than that but usually they're going to a much higher level of improvements. They're not just doing weatherization and replacing a furnace with more efficient equipment. They may be going the next step higher of investing in solar tv or geothermal heat pump or a much larger improvements. The nice things about this program is if we start rolling that in and we look at the higher resulting savings in the energy savings we rolls that back can we, generally speaking, find that we can finance even more money with the same monthly mortgage _____ and therefore even with those larger improvements we can end up not having have the customer write a larger check each month in order to pay their bills but they're still saving a lot of money. The benefit they're receiving of course is they're almost more comfortable, their utility bills are lower, they live in a more valuable home and once again, have not have to increase their monthly expenditures.
Next slide please.
Next Slide: Bank Interests
___ ___ ___ ___ want to do this? That's part of the convincing of getting another bank involved, it is fabulous for community engagement. Certainly we interact with our community more because we are talking about a subject at least in Colorado, most people are quite interested in and want to bet talking about that.
We want to ____ profitable loans although we are writing loans that are less profitable than typical loans, we are writing loans and we do make a profit on that. I do need to make aâ€¦..I guess a statement here that it is important when you are approaching a program partner, a bank, any sort of financial institution that they're allowed to make a profit on what they do. There's aâ€¦I talked to a lot of people who want to work in this industry and they feel like they have to work for free in order to be a good industry partner. Unfortunately those are the industry partners that the next year are no longer industry partners because they didn't make a profit and so they disappeared. So when it comes to an industry especially in lending where a bank must make a profit on what they do whatever program is designed has to allow for at least some profit _____ that financial institution.
Certainly improve reputation for the bank is a nice thing. People are actively involved in wanting to do something to help preserve our environment, having a bank associated with that is always a good thing.
___ ___ ___ us into the local market and the loan performance, I'm gonna have more on this in the next slide but is the presumption that loans that are made in this area will perform somewhat better than loans that are made to; the general borrowing public. Lots of reason to that, can I have that next slide?
Next Slide: Secondary Market
Looking at the Secondary Market as most people will know, when you make mortgage loan, that loan is often times not held by the bank that makes that loan. Originally there a lot of different set-ups within mortgage industries that allow for that but typically the servicing of loans is concentrated into a few large servicers in the nation. There are some that they can do that for lower cost than and individual bank can do. Thankfully that market is already established so a secondary market when we close on a loan we're gonna sell the note for that loan through Fannie Mae, Freddie Mac. They're gonna repackage that, sell it as a mortgage backed security; that market is already developed.
Mortgage backed security market however, does not currently recognize energy efficient mortgage or energy efficient homes as being a better risk than any other mortgage loan that is written out there. That's an area where certainly I would like to see it developed in that. If you look at the demographics of people that are investing in their home for energy efficiency typically they are well educated, employed ___ ____ ___ ____ a whole lot of money on their house, chances are they're gonna stay in that house for quite some time. That makes the mortgage loan worth more money because it's not gonna pay off right away and have to be re-originated another day. It would be great to see that market develop; I understand that there are some developments going on regarding that. We would certainly like to foster that in any way. One of the major ways that we can do it is simply by tracking the performance on these loans and I don't know if that has ever been well done. Before we were certainly doing with that we're writing however, continuing to do that with a larger mortgage market will be important part of seeing improvements in the market.
This is Brad here, I think I'd like to ask you to wrap up.
Thank you, Bradley. There's a lot of other areas that we could hit here, I'm gonna let this slide. ___ ___ self explanatory. If you would like to obtain more information, Scott if you last slide ___ the last one.
That's where to reach us and contact us. Please hit that website if you'd like to learn more about the individual product on the Energy Star Mortgage. Thank you much for having me.
Announcer: Matthew Brown
Thank you very much Stephen, that's terrific. So our idea here has been to have several different programs, profiles and several different lenders with really very different perspectives on this market. All of them going at the energy efficiency; financing from different perspectives as far as the institutions and the types of loan products that they're offering. Also with even different visions, to some degree, within the organizations. We're now at the point where we will entertain some questions, a number of you have already put questions through in the chat function. So I'm going to just provide some questions directly, I'm gonna mention specific panelists names as I address these questions or in a couple of cases will give a question that I'd like to ___ I might ____ into the full group.
So the first question that I'm just gonna send it right back to Stephen Ponce-Pore is regards to auditing, ___ ____ ___ Bank of Colorado conduct audits to ensure that the loans are spent on energy efficiency projects, specifically? ____ Stephen.
One of the requirements itâ€¦..the real answer is, it depends on the type of loan that being done. On some of the loans that we do the funds for the energy improvements are escrowed, meaning that before we can actually release those funds to the individual contractors we have to be able to see a post inspection to make sure those are done. We have to provide receipts for those paid improvements to the title company or the investor, whoever is holding those funds. On other funds we have a little bit looser agreement where we simply require that the customer post closing does provide us within 90 days with receipts showing that those improvements have been done. Those receipts have to obviously indicate that they've been paid.
Announcer: Matthew Brown
Next question is for John Berdes. The question was, how do you address loans that are in arrears or defaulting loans? How do you handle that?
If that's Gerald's question, I think it was more of a how are we underwriting folks who don't pay their utility bills real timely? Then I'll go to the second part in just a second. We are using as a credit or risk indicator, payment history of utility bills more so that a FICO or credit score. We are looking at the latter but relying on the former. We are approving loans for those who are chronically late because the feedback loop for not paying your utility bill is a lot faster and more painful than not paying your credit card timely. So we are relying on behavior and real life situations. We have also structured the fund to actively balance C02 impacts with credit quality, we expect losses, we don't forecast a ____ loss. We are underwriting into a balanced bottom line, that includes equitable access as I discussed and C02 impacts and our risk tolerant point is perked. We think in the right place but we're watching it closely. As to non-payment we are not relying on utilities to be a collection agency, the portion of the bill that is ours is separate from that portion which pays for energy provided to those utilities; they come first, we come second. Our terms are that after 90 days we can click the button that undoes the on-bill utility collection and be the primary actor in enforcing our position and then we act accordingly.
Announcer: Matthew Brown
The next question is for, I'm gonna start out, I'd actually like to get perspectives from each of the panelists, I'd like to start out with Peter Krajsa, which is because I know you have perspectives on this. There is certainly a long history of state run energy efficiency financing programs going back to the 80's and maybe Peter you could initially ___ ___, we can have others ____ in; share some thoughts on how your program is different from some of the other program, why it is that some of the older programs have really ____ _____ spotty success rates.
Yeah, I think I addressed some of that previously, I think the issue has been really bureaucracy and that's treating it like a consumer loan product. Again your competition for these, many of these products not the mortgage product and to a certain extent that ____ product is credit cards. The people who sell these items are contractors and they are looking at to financing as a tool for them to sell higher efficiency or more expensive product in a more affordable way. You have to make a program that is as easily accessible to contractors and not overly burdensome. I think previous state programs, ___ one's that I'm aware of required consumers to maybe apply through state office or go in some way to municipal building or even to a local bank and again the issue of going to a local bank who is not specializing in a product like this; like the bank of Colorado is that the people, the personnel there really aren't up to speed. My partner here John Hayes was a community banker for many, many years and he says you just can't have everybody in a branch up to speed on every state program available. So I think the programs that have been successful are the ones that realize that it's a consumer loan product driven through contractors and then if you have the system in place to recruit and train those contractors you're gonna end up having ineffective programs.
Announcer: Matthew Brown
Stephen Ponce-Pore, I'd like your thoughts on the same question but maybe ____ directed to how the energy savings mortgage and the Energy Star mortgage that you have differs from what's really been a fairlyâ€¦frankly unsuccessful history of the energy ____ energy efficient, Fannie Mae energy efficient mortgage product.
Happy to comment, and I've ____ one, Peter's got it for the contractors making a sale in somebody's house that kitchen table sale, you've got to have it available easily such that the customer can act. With the energy efficiency mortgage that has been available for many, many years through Fannie Mae, the reason I think that one has fallen on difficulties is that it is so complex that the consumer gets lost in it. Frankly most mortgage professionals have never done, one in fact that I have been in this industry for 15 years, I have never met another loan officer that has done an energy efficient mortgage through a conventional loan. There are a few out there that have done it through FHA, there is a very complicated project to work through. The beauty of the Energy Star mortgage and the energy saving mortgage is that it does not rely upon very complex overlay on top of existing mortgage. This is a standard mortgage product with a buy down if you'll do energy efficiency. So that simplifies it dramatically because it's not part of the underwriting process it is simply a matter of, we're gonna sale out what is literally one page sheets to figure out whether or not the improvements proposed actually meet the guidelines of the program, beyond that it's a standard mortgage.
Announcer: Matthew Brown
Thank you, Stephen. For John Berdes and Andrea, if you have perspectives on this, I guess, I'm gonna combine two questions in one. One is that same question, your thoughts on how what you're doing may differ from ____ in the past. Then a second question which is quite related about how you have created a partnership with theâ€¦.with utilities to have an on-bill financing program.
Well let me take a stab at that. We have I think, been frustrated as we've looked at scalable models. Fragmentation of various small pots of silo _____. That divide the marketplace into dots that don't connection in _______ and create demand. What we do believe is that what we're testing by building the table that we have is the opportunity to defrag the system by lending into a efficiency opportunity with the single loan product that's capable of taking the credit risk at the front end and then applying the fragments at the back end to reduce principal and have a net investment amount that reflects the application of resources that have been historically fragmented. That is the clearly in our minds the obstacle and national scale and we've been very careful; the city in particular in setting the places at the table, to have a public/private environment that makes that possible.
On the second question that I wanna ask Andrea to jump in here, you know we're blessed to have a policy environment in Oregon that created an aggregator in the form of energy trust. I think it creates many incentives, one of them is for utilities to be at a shared table and again the table is so important. In this particular case, these three investor of utilities each share a portion of the consumer market within the jurisdiction called Portland, ORG. But each of them shares other operating geographies that go well beyond Portland. We're a bit urban and rural in the Pacific Northwest. I think one of their motivations in our case is the desire for scalable approach; creditable scalable approach throughout their operating markets so they can better serve their customers and reduce their own footprints.
Yeah, I would just want to add to that; I mean John mentioned in the original presentation ___ the culture of collaboration needs. Facilities have been sitting at this table with us for a long time. I mean we run a lot of behavior change programs out of the city of Portland that utilities are partnered with and customer satisfaction is very important driver for them and that also have a lot to do with why they're at the table. The policy environment too here includes House Bill 26 26 which was passed ___ ___ 2009 legislative session through the energy efficiency ___ ____ Technology Act which basically mandates the state to work with utilities to create financing pilots around the state on bill ____ being one piece of that. So they definitely saw that coming down the pike and the Portland pilots started before that legislation was passed but the legislation was developed in concert within parallel to the development of the Portland pilots ___. There was some direct incentive for them to get a little bit ahead of that and realizing that legislation was gonna make them do this eventually anyway.
Announcer: Matthew Brown
Well thank you very much; I think we've come to the end of our call. There were a number of people who had texted in questions and I apologize because we need to wrap this up. At this point we will be posting theseâ€¦.the webinar and the presentation to do the solutions; the EECBG Solutions website. We'll be sending out an email with the, a link to that website to all the participants on this call. I very much appreciate all of you, all of the presentations from the panels of very interesting; very well done and thank you very, very much. We will look forward to participation from everybody else who is on this call as a participant in future webinars. The next one will be a week from today at the time. So thank you very much and have a good weekend.