Housing Act Aims to Encourage Energy Efficient Mortgages

August 6, 2008

President Bush signed the Housing and Economic Recovery Act of 2008 into law on July 30, and while the act is focused primarily on addressing the mortgage crisis in the United States, it also includes measures to encourage the greater use of energy efficient mortgages (EEMs). Such mortgages allow people to purchase or refinance their principal residence and incorporate the cost of energy efficiency improvements into the mortgage. But while the idea is laudable, the implementation of it is difficult, as the borrower must first receive a home energy rating report, usually from an energy consultant, and the report must demonstrate that the energy efficiency improvements are cost effective. After the loan closes, the money for the improvements is placed in an escrow account and is not released until an inspector verifies that the improvements are installed and will achieve the desired energy savings. Due to both the complicated nature of EEMs and a lack of awareness of them, the Federal Housing Authority has typically issued only about 30,000 EEMs per year.

To address that issue, Section 2902 of the new act requires the Secretary of Housing and Urban Development (HUD) to develop recommendations to eliminate the barriers to the use of EEMs, including the lack of reliable and accessible information on such mortgages, the confusion regarding underwriting requirements, the complex and time-consuming process of securing such mortgages, the lack of publicly available research on the default risk of such mortgages, and the limited availability of certified or accredited home energy rating services. HUD must report its recommendations to Congress within the next six months. The act also calls for HUD to carry out an education and outreach campaign for consumers, home builders, residential lenders, and other real estate professionals on EEMs and on the benefits of energy efficiency in housing.

In addition, Section 2123 of the act increases the limits for cost-effective energy efficiency improvements. For most homebuyers, the cost of improvements can now be nearly 5% of the property value, while it was previously limited to $8,000. But the act also limits the number of energy efficient mortgages to 5% of the number of mortgages for 1- to 4-family residences insured by HUD during the preceding fiscal year. See President Bush's signing announcement, the full text of the act (PDF 629 KB), and the HUD Web page on the Energy Efficient Mortgage Program.