Renewed push for 'energy-efficient' mortgages

A new certification program aims to promote energy-efficient homes by encouraging lenders to shave a half-point off the mortgage rate.

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The Freedom Seal program, which was announced in early May, is the latest effort to persuade homeowners to put energy savings near the top of their wish lists when they buy or renovate their houses.

So far, the program has signed up one participating lender, Advantage Capital Funding in Houston, which says it will cut half a percentage point off mortgages for borrowers with good credit. Advantage Capital primarily underwrites large commercial mortgages for projects such as golf courses and office and apartment buildings.

Lending at below-market rates doesn't sound like a promising way for a lender to make money, but Don McClain, president of Advantage Capital, says his company will count on volume. So far, there hasn't been much volume: The program is just getting off the ground, and about 25 houses have received Freedom Seal certification. Most of those buyers used other lenders at market interest rates.

"We're encouraging all mortgage companies to participate," says David Goswick, director of the Freedom Project Alliance, which runs the certification program. Lenders won't have to offer the half-point discount on mortgage rates. Mortgage companies owned by builders might be the most likely to offer rate discounts -- as part of a package of incentives.

Goswick is a real estate marketing consultant in Houston, and perhaps Freedom Seal is best understood as a marketing program designed to sell energy efficiency. Builders that construct housing developments to Freedom Seal standards can tout that in their advertising, using the Freedom Seal logo. Goswick says that building a home to the standard adds about 1 to 3 percent to the home's cost.

Among the standards the home must meet: It must get a five-star rating under the Environmental Protection Agency's Energy Star program, which means that an inspector must certify that the house is at least 30 percent more efficient in its heating, cooling and water heating than a comparable home built to a 1993 energy code. The dishwasher, refrigerator, clothes washer and water heater must meet certain efficiency standards and the house must have air and moisture barriers.

The house must meet certain environmental standards (such as having carpet padding made from recycled material) and safety standards (such as anti-scald showerheads). An independent inspector determines whether the house meets the criteria.

The idea, Goswick says, is to get homeowners and lenders to focus on cost of ownership rather than cost per square foot. "If you were looking at buying a home, and one home was 2,200 square feet and it looked similar to the same home that was 2,200 square feet next door, and yet it cost $100 more to heat and cool it per month, those homes aren't equal," he says. In addition to having lower energy bills, Freedom Seal-certified houses might cost less to insure because of the safety and construction requirements.

Energy-efficient predecessors
Mortgage giants Fannie Mae and Freddie Mac created what they called the Energy Efficient Mortgage program in 1994, but the loans never really caught on because few buyers knew about them. Now Fannie Mae is pushing the program anew, signing up new lenders that plan to market the loans more aggressively.

The EEM loans allow lenders to treat energy savings as borrower income. For example, if a house is so energy efficient that it would save a borrower $100 a month in electric and gas bills over an equivalent "reference home" without energy-saving features, the lender can count that $100 as extra income. This can help borrowers qualify for more expensive houses.

EEM loans also allow independent inspectors to use a formula that increases the house's appraised value.

"That allows the borrower to borrow more money because the house is worth more than maybe the house next door that's (otherwise) identical but doesn't have the energy efficiencies in it," says Lisa Rambler, senior vice president for Atlanta-based BancMortgage, which plans to start offering the mortgages in early June.