EPC - ENERGY STAR® Mortgage

What is the ENERGY STAR® mortgage?
The ENERGY STAR mortgage is an innovative, responsible, and secure financing tool that will enable consumers who own a home, or are buying a new one, to make energy efficiency improvements that will dramatically lower their home energy use and utility costs, and, in most cases, reduce mortgage expenses. These improvements will also lead to a reduction in the overall carbon emissions associated with a home’s energy use. ENERGY STAR mortgages will be offered by private lenders to owners of existing homes or purchasers of homes that are newly built, with an ENERGY STAR designation, or that can achieve a 20 percent energy savings through weatherization improvements. The energy savings are calculated into the loan mechanics, allowing most ENERGY STAR mortgage borrowers to obtain lower-cost loans, even with the rehab work. We believe that ENERGY STAR mortgages will be especially critical for owners and buyers of older, energy inefficient homes and of ENERGY STAR-designated homes.

What is the goal of the ENERGY STAR Mortgage pilot program?
The ENERGY STAR Mortgage pilot program is a public/private partnership designed to help homeowners reduce homeownership costs through energy efficiency. By reducing utility costs via whole home energy efficiency improvements, we believe that most borrowers will also reap mortgage savings.
The pilot program allows lenders to license the ENERGY STAR brand, a brand recognized by 70 percent of American households. In exchange for this enormously valuable marketing tool, participating lenders must provide borrowers with a cost advantage, such as an interest-rate discount, reduced loan fees, closing-cost assistance, or another benefit that reduces the cost of the mortgage compared with the financing package that would otherwise be available to that borrower.
In this way, ENERGY STAR mortgages achieve affordable, energy-saving and carbon-reducing improvements to homes, by lowering energy bills and, in many cases, reducing monthly mortgage expenses. We also believe that energy efficient improvements will increase the value of these homes, compared with homes in similar neighborhoods.

The benefit provided by lenders must be approved by Energy Programs Consortium, as part of an audit review and pursuant to agreements with the US Environmental Protection Agency (EPA) and the US Department of Energy (DOE).

Who is sponsoring the program?
The program is sponsored and administered by the Energy Programs Consortium (EPC), in partnership with the U.S. Department of Energy, U.S. Environmental Protection Agency, state energy and housing agencies, and key support from the Ford Foundation and the Surdna Foundation.

EPC is a 501(c)(3) nonprofit organization that conducts policy research and launches and manages demonstration programs Affiliated with state energy agencies including: National Association of State Energy Officials, National Energy Assistance Directors' Association, National Association of Regulatory Utility Commissioners and National Association for State Community Services Programs.

Who can participate in the program?
Any person who is an owner or purchaser of single family homes, defined as one-to-four family, owner-occupied homes, may participate. The program is available to borrowers at all income levels, including lower-income families, for whom we may bundle available public subsidies to achieve even greater cost-savings.

Which lenders may offer ENERGY STAR Mortgages?
Any lender operating in any of our current pilot states (Maine, Massachusetts, New York, New Jersey, Pennsylvania, District of Columbia and Colorado) may participate, as long as they meet our program guidelines. And, any mortgage loan product is eligible to be approved.

What must the ENERGY STAR Mortgage include?

Use a state approved energy audit firm and audit tool;
Provide the homeowner or homebuyer with an additional benefit over and above the energy savings (closing cost reduction or grant or a lower loan interest);
Either the mortgage or another loan or grant that funds the energy improvements leads to at least a 20% reduction in energy bills.

How does an energy efficient mortgage work?
An energy efficient mortgage incorporates the cost of energy efficiency investments into the total lending package. If the energy work is included in the loan, often through a refinancing, a typical, 30-year term of a mortgage effectively reduces the monthly payments for these improvements (as compared with a straight rehab loan) and can permit the borrower to deduct the full mortgage interest from their federal and state income taxes, further reducing improvement costs.

The energy work can be included in the mortgage, but does not have to be. We know that lenders know best what types of products will meet their customers’ needs for savings. So, we allow the energy work to be accomplished using unsecured loans, state subsidies, public benefit funds or utility supported energy loans, a second mortgage, or grants. Through this flexibility, we allow lenders to use the valuable ENERGY STAR brand in a package the best meets consumers’ needs for savings.

I have heard that energy audits are expensive and take a long time. What have you done differently for this program?
Because our mortgage product is based on the achievement of a 20 percent energy savings, ENERGY STAR borrowers must be able to document those savings. Therefore, the home must obtain an energy audit. However, unlike other government programs, we do not mandate a single type of audit nationwide. Rather, we allow borrowers to use whatever kind of audit is approved and available in that borrower’s state. By increasing the number and types of audit tools, we have reduced the average audit cost. Some lenders are covering the cost of the audit as part of their benefit. And, some pilot states are offering reduced-cost audits to ENERGY STAR borrowers. We are also permitting the audit cost to be included in the mortgage.

What is the minimum energy savings that the home must achieve to qualify?
Energy efficiency investments that produce at least a 20 percent reduction over current home energy use is the minimum. However, most measures that borrowers will take will achieve even greater efficiency, including installation of better insulation, energy efficient lighting and windows, and furnace and air conditioning replacement.

Describe the Energy Star mortgage product offered by participating lenders

The ENERGY STAR Mortgage consists of a first or second mortgage on the borrower’s primary residence that is limited to the government-sponsored enterprises (Fannie Mae and Freddie Mac) maximum allowable mortgage loan size. The mortgage can be a stand-alone mortgage containing the improvements, or a mortgage closed simultaneously with a subordinate energy efficiency loan funded via public monies, utilities, or other sources that includes the efficiency improvements, whichever is in the best financial interest of the homeowner. The first or second mortgage can be any kind of structure, including a fully amortizing fixed-rate mortgage of various terms, a reverse mortgage, or an interest only/amortizing hybrid with a fixed term and adjustable-rate mortgage as long as the borrower qualifies for the loan at the time of application to its highest adjusted rate and shortest structured term.
The loan may be for the purchase of an ENERGY STAR-qualified home (verified and labeled), or a home purchase or refinance.
The proceeds of the loan(s) must be used for a Home Performance with ENERGY STAR assessment and improvements that lead to at least a 20 percent total home energy savings over the home’s previous energy usage. As part of the home energy assessment, the homeowner must be informed of the most cost-effective improvements that will achieve at least 20 percent total energy savings.
There must be a verifiable borrower benefit provided by the lender that may include, for example, a discounted mortgage rate, closing cost assistance, or other financial benefits that will help reduce the cost of the total loan package.
Entities verifying the energy efficiency of homes, and contractors performing the improvements must be approved by the state.
The mortgage can incorporate available state and other discount programs.
No "fee" will be charged to lenders to cover the initial review of their proposed energy efficient mortgage practices.

Describe the lender approval, oversight and review process.

The pilot program is open to all regulated lenders and state-supported loan programs, as long as the lender is approved by and maintains good standing with the Energy Programs Consortium.
Lenders will sign a legally binding agreement to comply with program requirements. That agreement outlines the consequences for non-compliance, including dismissal from the program.
On an ongoing basis, EPC will monitor and report to the US Department of Energy and the US Environmental Protection Agency the lending activity and compliance of the approved lenders.

All participating lenders must:

Show capitalization sufficiency and approved secondary market affiliations.
Permit EPC and its auditors to determine capacity through facilities, team, and systems reviews.
Document consumer “benefit,” including proof that any benefit is not offset by an increase in other loan costs.
Agree to an annual RESPA-compliant loan activity review of a statistically significant number of all the ENERGY STAR Mortgages made.

What are the ENERGY STAR license benefits?
All participating lenders may use the ENERGY STAR brand to market and promote an ENERGY STAR mortgage, provided that they fulfill the legal agreement requirements and sign a trademark protection agreement with US EPA.
Which states are participating in the pilot program?
The ENERGY STAR Mortgage pilot launched first in Maine in February, 2009. Additional states launching this spring include: Colorado, Massachusetts, New Jersey, New York and Pennsylvania, plus the District of Columbia. More states are expected to join the program later in 2009.

Can other lenders or state agencies join the program?
Yes. The pilot program is open to all regulated lenders and/or state-supported loan programs that sign an agreement and fulfill program requirements. Interested parties must submit an application to Energy Programs Consortium, who will forward the application for review and follow up to US EPA.

How can a borrower get an ENERGY STAR loan today? Who are the lenders?
Today, only borrowers in Maine may obtain an ENERGY STAR loan. We are in the final stages of our approval process for a number of Maine lenders whose names will be released next week.

For more information about the ENERGY STAR Mortgage Program, please contact:
Mark Wolfe, Energy Programs Consortium, 202-237-5199 / mlwolfe@energyprograms.org;
Or
Howard Banker, Energy Programs Consortium / hbanker@energyprograms.org