New bill to include borrower energy costs in mortgage underwriting

A bill introduced Wednesday would force lenders to consider a borrower’s expected energy costs when underwriting a government-backed mortgage. Sens. Michael Bennet (D-Col.) and Johnny Isakson (R-Ga.) are the co-sponsors of the Sensible Accounting to Value Energy Act. If enacted, lenders for Fannie Mae, Freddie Mac and the Federal Housing Administration would have to take into account how much a borrower pays for electricity and gas when determining if he or she could meet the monthly mortgage payment. Bennet and Isakson said the average homeowner spends more than $2,000 annually on energy costs, which is more than either real estate taxes or home insurance. The senators claim the legislation would clear borrowers to finance cost-effective home energy upgrades as part of the mortgage. “The SAVE act would address this blind spot, giving a more complete picture of the costs of homeownership and borrowers’ capacity to service debt,” according to a statement from the senators’ office. Tim Cornelison, a lender with United Community Bank in Blairsville, Ga., and a constituent of Isakson, couldn’t believe policymakers would consider including such a hazy variable into an already tight underwriting process. “The idea that utility costs are not factored into the decision process on a mortgage is a misconception and comparing energy costs to taxes and insurance is insane. If you own a home you must pay taxes and if you have a mortgage insurance coverage is required and specified by the lender. Energy consumption varies greatly from household to household in identical residences,” Cornelison said. The SAVE act is backed several industry and consumer groups including Ross Eisenberg, counsel on environment and energy at the U.S. Chamber of Commerce; Philip Henderson, the senior financial policy specialist at the Natural Resources Defense Council; and the Appraisal Institute. “Energy conservation is important but enforcement through underwriting is impossible,” Cornelison said. “An underwriter’s job is to assess risk and they are not trained to measure energy efficiency. Local governments should establish and enforce conservation regulations through building standards and energy codes that are appropriate for their communities.” Henderson said refinances would be easy to underwrite, as the borrower would already have an energy pay history tied to that property. For existing home sales, the bill would compare energy bills from house to house, not borrower to borrower. “So the fact that different families in similar houses have different expenses isn’t a problem,” he said. Roughly 30% of new homes come with a home energy audit. The trick is understanding how a lender factors the energy audit and the estimate of expenses into the eligibility decisions. “Enable the mortgage agencies to get a tight a handle on this. It will take some time, but other criteria such as credit scores took years to develop,” Henderson said. “There’s some question on how accurate it would be, so let’s collect the data on this.” Henderson clarified the bill wasn’t meant to inundate smaller lenders with more guesswork, especially when new regulations are already pushing more business to larger banks. Instead, he said he supported the bill because estimating energy costs are something Fannie, Freddie and the FHA could automate. “The bill aims to have Fannie and Freddie do with energy expenses what they do with property taxes and insurance. They already do this. The question is why aren’t they doing it with energy expenses,” Henderson said. Write to Jon Prior. Follow him on Twitter @jonaprior.