Waste Not, Watt Not : Conservation: Cost of repairs to save energy can be added to home loan without adding qualifying requirements. New rating system will make it easier to get ‘energy-efficient mortgages.’
Jerry and Lorna Sullivan had been house hunting for four months and had looked at about 30 homes when they found the one they wanted and could afford.
It was a 1909 cottage on a lovely tree-lined street in the old part of Upland now undergoing renewal.
The newlywed couple was taken with the 1,100-square-foot, two-bedroom, one-bath
house, and after offers and counteroffers, they bought it for under the $115,000 limitthey had set for themselves.
But there was one problem: The old house was drafty, leaking at every joint. It would be very costly to heat and cool to comfortable levels.
But Jerry Sullivan had an idea.
As a reporter for the Inland Valley Daily Bulletin in Upland, he had written stories about Ray Hall, an advocate of something called “energy-efficient mortgages.”
Sullivan had learned that Hall and his company, H&L; Energy Services in Ontario, could make older homes much more energy-efficient--detecting and sealing the holes that create drafts, insulating the attic and walls, and treating windows to block the sun’s heat.
Further, Sullivan knew that the cost of those repairs could be added to the home mortgage in the form of an energy-efficient mortgage, or EEM as it is nicknamed, without adding qualifying requirements. And the reduction in the utility bills would be greater than the increase in the monthly house payments.
Hall encouraged Sullivan to ask his loan officer at Directors Mortgage in Upland about getting an EEM through the FHA. He did, and the lender’s phone call to the FHA verified that the Sullivans were eligible for the EEM.
But soon homeowners won’t need to be reporters to find out what Jerry Sullivan knew.
For while the Sullivans were house hunting, a coalition of California utility companies were working to create a home energy efficiency rating system to make EEMs, created by federal legislation 12 years ago, as familiar to everyone in the housing market as standard mortgages.
The rating system is called the California Home Energy Efficiency Rating System, or CHEERS. Eventually, most homes will have CHEERS ratings doing for them what gas mileage ratings do for cars--telling prospective owners how energy-efficient the house is.
The goal is to make energy efficiency an integral part of housing market forces. Houses with low CHEERS ratings will be cheaper, and investing in repairs to make a home more energy-efficient using an EEM will increase its CHEERS rating and its market value.
As the required first step before the Sullivans could apply for their EEM, Hall inspected the house and estimated it would cost $2,000 to make it more energy-efficient. The Sullivans submitted Hall’s estimate with the application for the EEM to the mortgage company.
When they got their EEM and moved in, five H&L; employees set to work on the drafty old house. A door blower, which looks like a giant box fan, was installed in the back door. As air was pumped into the house creating positive pressure, the men fanned out, locating and plugging the leaks where air was being forced out: holes around pipes in cupboards, spaces behind other cupboards, a crack between the cast-iron bathtub and the enclosure it sat in. Windows and doors were weatherstripped.
The computer monitoring the door blower printed out the results: Air leakage has been reduced 64%.
Later in the day, insulation was laid down in the attic and blown into the walls. Solar screens, which look like window screens with a tighter metal weave, were installed on the south- and west-facing windows to block out sunlight. An attic fan was installed to improve air circulation in the house.
As a result of their EEM, which added just $12 a month to their mortgage payment, the Sullivans got a house that is much more comfortable to live in, and they will save between $20 and $25 a month on utility bills. Plus, they will get a $360 rebate from Southern California Gas Co. What’s more, the CHEERS rating should add resale value to the house.
Before it was made energy-efficient, the Sullivan house rated a 50; afterward it received a 70, making it almost as efficient as a new house built to California’s Title 24 energy-efficiency building standards for new homes.
Three years ago, when The Times printed its first story on EEMs, homeowners and buyers, as well as lenders and realtors still knew virtually nothing about them. But the word is expected to spread rapidly as CHEERS is publicized by California’s utilities.
The market for EEMs is enormous. Jim Curtis, executive director of the National Assn. of Energy Efficient Mortgage Service Cos., a trade group located in Palo Alto, reports that in 1992, about 800,000 home loans were taken out in California, representing both purchases and refinancings. Only 10% of these homes were built to comply with Title 24 standards. The remaining 90%, more than 700,000 homes, are, on average, 28 years old and virtual energy sieves.
Almost all of the 12,000 EEMs that have been completed in the past 12 years in California, according to Curtis, were financed by the Veterans Administration or FHA, which on average represents only 20% of the California home mortgage market.
The Federal National Mortgage Assn. (Fannie Mae), and Federal Home Loan Mortgage Corp. (Freddie Mac), quasi-governmental agencies that buy mortgages in the secondary market, also have guidelines to finance EEMs, but they are so complex that the marketplace has virtually disregarded them. With no home buyers demanding EEMs, many realtors and lenders have remained ignorant of them.
Guidelines are complex because they require the EEM to be based on an appraisal of the improvements. Without an objective rating system, the appraised value is usually about 60% of the cost to install the improvements. However, if the EEM is for $2,000 or less, the FHA will waive the need for an appraisal, as in the case of the Sullivan loan, making the process much easier.
Change is coming slowly. The National Energy Policy Act passed last October and two other pieces of home loan legislation signed into law by then-President Bush call for doing away with basing EEMs on appraisal values and making home energy-efficiency rating systems available nationally instead of just in the dozen states where they now exist.
It has always been easier to get an EEM for a new home or one that is already energy efficient. The guidelines allow buyers to qualify for a debt-to-income ratio stretch increasing the home loan amount 2% on any home built to California’s Title 24 standards. (Guidelines allow stretches as high as 7%, but without a home energy rating system that could prove the home is more than minimally efficient, California residents are currently stuck with a 2% stretch.)
Larry Kurmel, executive director of the California Bankers Assn., said, “It’s been hard to get market acceptance of energy-efficient mortgages because it’s hard to price them.” He explained that it is like putting the cart before the horse when they created energy-efficient mortgages before there was a system to tell consumers and lenders how energy-efficient a house is.
“If I, as a borrower, can get better terms with an energy-efficient mortgage, it is a real incentive to invest in energy conservation, and it is an incentive as a loan officer to loan the money,” Kurmel said.
Tony Occhionero, a special projects manager in marketing at Southern California Gas Co., is in charge of his utility’s CHEERS pilot program. He said the Gas Co. has been field-testing the rating system on 60 employees’ homes. “This is perhaps the first program that approaches energy conservation on a complete, comprehensive basis,” he said.
Occhionero explained that if he had improved his old home he could have reduced his utility bills $500 to $700 a year. Utility bills in his new home, built to Title 24 standards, are $1,000 a year less.
“A banker can see this as perhaps one payment a year,” Occhionero said. “It lowers his risk, and the homeowner is paying the money to the bank instead of to the utility.”
The Los Angeles Department of Water and Power and Southern California Edison Co. have also been testing CHEERS on employees’ homes. Greg French, the CHEERS executive director, said the Southern California portion of the CHEERS pilot will begin in Ontario in late July or early August. CHEERS organizers expect to be deluged with calls when they start advertising that 1,200 free ratings will be available in Ontario.
CHEERS will also hold briefings for lenders and realtors in the area on EEMs and CHEERS and how both will benefit them. Later, independent contractors will be trained by the utilities to use CHEERS and then offer ratings on a fee basis.
