Green Money: Energy-Efficient Mortgages and Green Investing

Look for greener options when investing, and put your money where your values are.

| January/February 2006

Green mortgages

“I've been looking into a green building project and heard about green mortgages. Can you tell me more?”
Seattle, Washington

Mortgage lenders originate residential financing against real property; this debt is then sold to organizations such as Fannie Mae and Freddie Mac, which in turn sell these “mortgage-backed securities” as rated investment vehicles to insurance companies, pension funds, and other institutional investors. If the real estate is a certified green building, the mortgage attached is a “green mortgage-backed security” and is inherently more secure and attractive. The hard part has been standardizing the guidelines and methods that govern the marketplace for such products. Building, zoning, and contractual standards are being created as the green building industry expands.

Fannie Mae’s Energy Efficient Mortgage (EEM) is available through lenders such as Countrywide Mortgage and brokers with wholesale access to Countrywide programs. Consumers purchasing energy-efficient homes must obtain a Home Energy Rating System report (HERS), the standard measurement of residential home efficiency. The home receives a rating between 1 and 100 for such factors as window efficiency, heating and cooling efficiency, wall-to-window ratios, insulation, solar orientation, and local climate and utility costs. The HERS report suggests improvements, estimating savings and total cost. The cost of the energy improvements can be included in the mortgage, although they cannot exceed 15 percent of the home’s value. The estimated energy savings can be added to a home’s total net worth if they exceed the costs of installation. If the benefits do not exceed the costs, the building won’t qualify for EEM.

When complete, a HERS rating is compared to a control home without energy-efficient measures. The savings over the building’s life is taken into account as extra income when qualifying the borrower. Eligible borrowers can obtain a Fannie Mae EEM with only a 3 percent down payment. My Community Mortgage, also from Fannie Mae, is directed toward low- to moderate-income borrowers. Its an important program that offers low-income families the benefit of an environmentally efficient home with less of a down payment requirement than that of the EEM program—$500 or 1 percent of the transaction, whichever is less. There are no income limits for these borrowers, but property must be located in designated census tracts or inner cities.

Joe Morant, a full-service mortgage professional in Marin County, California, contributed to this answer. Morant specializes in efficiency financing for residential and commercial clients.

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