Owners of energy-efficient homes—defined as those with Energy Star ratings—are 32 percent less likely to default on their mortgages and the more efficient the home is, the lower the default risk drops, according to a new study from the University of North Carolina at Chapel Hill (UNC) Center for Community Capital and the Institute for Market Transformation (IMT). The study, “Home Energy Efficiency and Mortgage Risks,” also found that for each point on the Home Energy Rating System (HERS) index of efficiency, the risk of mortgage default on a home drops.
The study is the first to examine the links between home energy efficiency and mortgage risks on a national scale, and compared data for a sample of 71,000 homes from 38 states and the District of Columbia. Sample homes were all derived from CoreLogic’s mortgage database and were all single-family, owner-occupied homes whose loans originated from 2002 to 2012. About 35 percent of the homes in the study—approximately 24,944—were Energy Star-rated for efficiency. The remaining homes formed a control group and were randomly selected within the same ZIP codes as the Energy Star homes. A total of 71,000 homes were studied, and variables examined for the homes included the age of the house, square footage, FICO scores, ZIP code average incomes and unemployment rates, the typical time to default, the sale price, heating- and cooling-degree days, and electricity prices. The average sale price of the homes in the sample was $220,000.
Improving a home’s energy efficiency can have a significant effect on a homeowner’s pocketbook, as the amount of money spent on energy annually equates to 15 percent of the cost of home ownership, said Dr. Nikhil Kaza, a research fellow the UNC Center for Community Capital and an author of the study. These costs vary geographically, as well, with rural households paying $400 more on average than urban households, Kaza added during a media event for the release of the study. Paying less for energy saves money for the homeowner, who could use those savings to make a mortgage payment. However, one of the challenges, Kaza said, was that while the monthly savings of energy-efficiency efforts leverage out the upfront costs of doing them, the mortgage-lending process does not include the financial benefits of energy-efficiency savings in its underwriting decisions.
“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” says Cliff Majersik, executive director of IMT. “We long believed this to be the case, and now this study proves it.”
Roberto G. Querica, the UNCE Center for Community Capital director and one of the study’s authors, adds that “Consumer and industry acceptance of energy efficiency is high. But the lack of broad consideration of potential energy savings in the mortgage underwriting process still prevents many moderate- and middle-income homebuyers form fully enjoying the cost savings. Since our study findings now show that energy efficiency is strongly and consistently associated with lower mortgage lending risk, lenders and policymakers have one more reason to promote it.”
The study authors were holding a briefing on Capitol Hill following the release of the report, and recommend that Congress consider the findings in its deliberation of current and proposed legislation to improve the accuracy of mortgage underwriting. One suggestion from the study team includes that lenders consider requiring an energy audit or rating such HERS as part of the mortgage underwriting process, and that federal housing agencies such as Fannie Mae and Freddie Mac promote underwriting flexibility for mortgages on energy-efficient homes.