Home Energy Efficiency and Mortgage Risks

A new report by the UNC Center for Community Capital and Institute for Market Transformation shows the risk of mortgage default is one-third lower for energy-efficient, ENERGY STAR-rated homes-a factor lenders and Congress should consider when making mortgage loans and policy.

It is the first academic study to assess the linkage between energy efficiency and mortgage risks.  Researchers examine a sample of 71,000 home loans from 38 states and the District of Columbia, all derived from CoreLogic’s mortgage database.  The sample is restricted to single-family, owner-occupied houses whose loans originated during 2002-2012.

About 35 percent of the houses in the sample were ENERGY STAR-rated for efficiency.  The odds for a mortgage default on an ENERGY STAR residence are one-third lower than homes without and ENERGY STAR rating.  Additionally, the study found that the extent of energy efficiency matters:  The greater a house’s efficiency, the lower the risk of default.

Congress should consider these findings in its deliberation of current and proposed legislation to improve the accuracy of mortgage underwriting.  Lenders may want to require an energy audit or rating as part of the mortgage underwriting process, and federal housing agencies could promote underwriting flexibility for mortgages on energy-efficient homes.

American households spend around $230 billion each year on energy, not including transportation, and the residential sector accounts for 20 percent of the total energy consumed in the United States.  Energy efficiency in the residential sector has a potential to save $41 billion annually, according to research by McKinsey & Company.

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