Mortgage Defaults Much Lower in Energy Star Homes

The risk of defaulting on a mortgage is 32% lower for people that live in energy-efficient, Energy Star-certified homes, concludes a study.

Interestingly, the more efficient the house, the lower the default risk. For each point on the Home Energy Rating System (HERS) index of efficiency, the risk of default drops.

It follows then that lenders and Congress should consider this when making mortgage loans and policy, the authors say.

"Home Energy Efficiency and Mortgage Risks" is produced by the University of North Carolina at Chapel Hill’s Center for Community Capital and the Institute for Market Transformation. 

"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 from fully enjoying the cost savings," says Roberto Quercia, one of the authors.

This is the first academic study that analyzes the connection between home energy efficiency and mortgage risks. It looked at a sample of 71,000 single family home loans from 38 states and the District of Columbia originated from 2002-2012.

The average sale price of the homes in the sample was about $220,000, so they are not solely luxury homes.

"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 Institute for Market Transformation. "We long believed this to be the case, and now this study proves it. Successful housing market reforms will require reconsidering the risk factors in mortgage default, including energy costs."

Could it also be something about the people who tend to buy Energy-Star homes? They likely do more research and value energy efficiency. They could be more financially astute, the authors say, the subject for another study. That too, would make buyers of these homes a lower risk to lenders.

The findings have significant policy implications:

  • Lenders might allow for lower risk premiums that are associated with interest rates, a more flexible credit profile, or a higher debt-to-income ratio for people buying or refinancing efficient homes. This would increase the affordability of energy-efficient homes among many borrowers, especially in high-cost areas.
  • Lenders may want to require or strongly recommend an energy audit or energy rating during the process of mortgage underwriting. In the same way that appraisals are done to calculate the value of the home, an energy rating or audit could define other important loan characteristics.

The Energy Star label is currently on 1.4 million homes, growing by 400,000 since 2009. Many of the biggest builders in the US have pledged to build Energy Star homes.

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