DOC

Lender EEM Handbook

By Lawrence Mills,2014-05-14 01:13
6 views 0
Lender EEM Handbook

Financing Energy Efficiency

    A Handbook for

    Iowa Lenders

    Iowa Association of Municipal Utilities

    Iowa Energy Center

    Written by

    Randy L. Martin

    R. L. Martin & Associates

     i

    Table of Contents

    Why Should A Lender be Concerned with Financing Energy Efficiency?..................................1

    What Is Energy Efficiency Financing? .........................................................................................1 How Do You Determine “Energy Efficient?” ...............................................................................2

    Energy Efficient Mortgages............................................................................................................2 Energy Improvement Mortgages ....................................................................................................4 Energy Improvement Loans ...........................................................................................................5 Setting up an Energy Efficient Financing Program .....................................................................5

    Energy Efficiency Loan Processes .................................................................................................6 FHA Guidelines ..............................................................................................................................7 HUD CIRCULAR LETTER TAM-96-01 March 14, 1996 .................................................................. 8

    Mortgagee Letter 95-46 .......................................................................................................................... 9 Mortgagee Letter 95-40 ........................................................................................................................ 11

    I. THE CONSULTANT ..................................................................................................................................... 11

    II. LENDER ISSUES ........................................................................................................................................ 12

    III. UNDERWRITING ISSUES ........................................................................................................................ 13

    IV. LOAN QUALITY ASSURANCE REVISIONS. ........................................................................................ 15

    V. APPROVAL OF NON-PROFIT AGENCIES. .............................................................................................. 16

    VI. ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM AND SECTION 203(k). ............................... 18

    VII. CONDOMINIUMS. ................................................................................................................................... 19 Mortgagee Letter 93-13 ........................................................................................................................ 21

    I. BASIC PROGRAM REQUIREMENTS ........................................................................................................ 21

    II. PROCESSING AND UNDERWRITING REQUIREMENTS ..................................................................... 23

    III. DISCLOSURE STATEMENT REQUIRED TO BE GIVEN TO ALLBORROWERS ............................. 24

    Attachment A EFFECT ON MORTGAGE AMOUNT OF ENERGY EFFICIENT IMPROVEMENTS ........ 26

    Attachment B ENERGY EFFICIENT MORTGAGE WORKSHEET ............................................................... 34

    PRESENT VALUE FACTORS for ENERGY EFFICIENT MORTGAGES .................................................... 38

    Attachment C U.S. Department of Housing and Urban Development ENERGY EFFICIENT MORTGAGE

    PILOT PROGRAM ............................................................................................................................................ 39 Fannie Mae Guidelines ................................................................................................................40 Summary of the Fannie Mae EEM/EIM Pilot Program .................................................................. 41

    The HERS .......................................................................................................................................................... 41

    The EEM ............................................................................................................................................................ 41

    The EIM ............................................................................................................................................................. 42

    EIM/EEM ........................................................................................................................................................... 42

    Documentation Requirements ............................................................................................................................ 43

    Guidelines for the Pilot ...................................................................................................................................... 43

    Qualifying ratios ................................................................................................................................................. 43

    Financing energy improvements ......................................................................................................................... 44

    Required documentation .................................................................................................................................... 45

    Delivery .............................................................................................................................................................. 46

     ii

Section 216 - Underwriting Mortgages Secured by Energy Efficient Properties .......................... 47

    Section 221 - Energy Improvement Mortgages ................................................................................. 48 Section 305 -Energy Efficient Properties ........................................................................................... 49 Section 305.01 - Development of Energy-Efficiency Rating ............................................................. 50

    Residential Energy Efficiency Improvement Loans ......................................................................... 52

    Benefits to utility customers ............................................................................................................................... 52

    Benefits to utility companies .............................................................................................................................. 52

    Loan details ........................................................................................................................................................ 52

    Eligible Customers ............................................................................................................................................. 53

    Processing loans ................................................................................................................................................. 53

    Underwriting guidelines ..................................................................................................................................... 53

    Risk sharing ........................................................................................................................................................ 53

    Examples of energy saving upgrades ................................................................................................................. 53

    Loan delivery ..................................................................................................................................................... 53

    Further Information ............................................................................................................................................ 53 Freddie Mac Guidelines................................................................................................................54 Subject: Energy-efficient mortgage program and revised energy addendum ............................ 55

    FREDDIE MAC’S ENERGY-EFFICIENT MORTGAGE PROGRAM ........................................ 57

    Energy conservation and rehabs ......................................................................................................... 63 Monthly debt payment-to-income ratio ............................................................................................. 65 Addenda required for certain appraisal reports (continued) .......................................................... 67

    Energy-efficient properties .................................................................................................................. 68 EEM Contact List .........................................................................................................................69 Key Iowa Contacts................................................................................................................................ 69 Key National Lending Groups ............................................................................................................ 70 Other Energy Contacts ........................................................................................................................ 71 Energy Raters in Iowa ..................................................................................................................72 Glossary Of Energy Efficiency Financing Terms .......................................................................74

    Special Thanks ..............................................................................................................................81 References .....................................................................................................................................81

     iii

    Financing Energy Efficiency

    An Overview

    Why Should A Lender be Concerned with Financing Energy

    Efficiency?

    David Carey, Director of Energy Finance for Fannie Mae said, “This ground-floor opportunity

    promises to be one of the more attractive new product offerings in recent times.” Today’s

    mortgage market is becoming more competitive. Mortgage lenders are looking for ways to bring

    in more customers. Becoming involved with Energy Efficiency Financing is a new and exciting

    way for lenders to increase their market share. The following are a list of reasons why lenders

    should be interested in financing energy efficiency:

    ? Larger & More Profitable Loans. Energy efficient homes generally cost more than

    conventionally built homes. This results in a larger loan with higher loan origination

    fees, etc. When underwriting FHA and VA energy efficient mortgages, lenders can

    exceed the statutory federal loan limits up to the amount of the energy improvements.

    Energy efficiency is no longer a problem.

    ? New Business From Trade Ally Partnerships. There is a whole industry out there

    promoting energy efficiency financing. Developing relationships with energy efficient

    builders, utilities, and vendors of energy efficient products can result in increased

    business. These groups are often very eager to funnel new business to a lender that

    expresses an interest in energy efficiency. You will have expanded your marketing

    efforts through the efforts of others without having to spend a dime.

    ? Lenders Can Qualify More Buyers. Since the advent of the Energy Efficient Mortgage

    (see discussion in next chapter) more people can qualify to purchase an energy efficient

    home than could qualify for the same house if it were not energy efficient.

    ? No Great Increase in Paper Work. Under the new FHA and VA guidelines, the

    underwriting process is reasonable and straight forward. Only one new form is required

    and in Iowa that form is prepared by Energy Rated Homes of Iowa.

    ? Lower Utility Bills Can Lead To Lower Client Defaults. Since your customers will

    have lower utility bills, they will have more financial resources to put towards their

    mortgage. This should result in fewer defaults.

There are many reasons for you a lender to become interested in financing energy efficiency.

    Let’s find out first what Energy Efficiency Financing is all about.

    What Is Energy Efficiency Financing?

    The whole concept of Energy Efficiency Financing began when builders started building homes

    in response to the rising energy costs of the 1970’s. Those cutting edge builders who added extra

    insulation, spent extra effort tightening their homes, upgraded their windows, and/or installed a

    higher efficiency heating and cooling system were now at a price disadvantage competing with

     1

    the average builder. The homes looked the same, but the initial cost was now a couple thousand dollars more. Builders tried long and hard to explain that their homes would be less expensive to own on a monthly basis than the traditionally constructed home, but many went out of business trying.

    Another problem was that by increasing the first cost of their homes, fewer people could qualify to purchase them. They now had a smaller market to sell to. Lenders only considered principal, interest, taxes and insurance when figuring debt-to-income qualifying ratios. Lower energy bills were not part of the standard equation.

    The Energy Efficient Mortgage (EEM) was born in 1979 when President Carter signed an executive order directing federal lenders to offer consumers incentives for energy-efficient homes. Fannie Mae & Freddie Mac responded by expanding the qualifying ratios by what has become known as the “two percent stretch.” This “two percent stretch” allows a lender to stretch both the housing debt-to-income ratio and the total debt-to-income ratio by two percentage points. These ratios are typically 28% and 36% respectively. This two percent stretch increases those qualifying ratios to 30% and 38% respectively.

    How Do You Determine “Energy Efficient?”

    This was good, but the problem was the ever present question, “What is Energy Efficient?” To solve this problem, a new energy efficiency evaluation tool was developed called a Home Energy Rating System (HERS). HERS typically use independent evaluators to determine the energy efficiency level of a home. The U.S. Department of Energy is currently working on voluntary guidelines for HERS programs. These guidelines call for a home to be rated on a 100 point scale -- the higher the number the more energy efficient the home. It has been determined that a home that scores an 80 out of 100 is considered to be “energy efficient” by the major lending groups. There are about 15 states that have Home Energy Rating Systems in place.

    Here in Iowa we have our own Home Energy Rating System called Energy Rated Homes of Iowa (ERHIa). ERHIa is part of Energy Rated Homes of America which is recognized by all the major lending groups. ERHIa has certified raters around the state and rates homes on the 100 point scale and then converts them to star ratings. ERHIa rates homes from one (?) to five-and-a-half

    stars (?????+), with five-and-a-half (?????+) being the best. Homes that meet the four star

    (????) level (80 points on the 100 point scale) are considered “energy efficient” and qualify for

    an Energy Efficient Mortgage.

    The best thing is that you as a lender do not have to worry about determining “energy efficient.” You can leave that up to an independent rater. You can concentrate on what you know best …

    financing. Today there are several energy efficiency financing products to handle different situations. The following sections discuss each product in detail.

    Energy Efficient Mortgages

    What is an Energy Efficient Mortgage (EEM)? The EEM was developed by the lending industry to give the builder/buyer of an energy efficient home credit for the fact that the home will have lower energy bills than a typical home. The program is typically used for new energy efficient homes, but can also be used for existing homes that are already energy efficient.

     2

An EEM allows a lender to stretch both the housing debt-to-income ratio and the total debt-to-

    income ratio by two percentage points. These ratios are typically 28% and 36% respectively.

    This two percent stretch increases those qualifying ratios to 30% and 38% respectively. Let’s

    look at an example of the effect that this has.

    You have clients that come in and want to purchase one of the nice new three bedroom homes at

    the edge of town. They have a choice of two different builders. One builds a good house but

    with little effort to make it energy efficient. The second builder has invested time and materials

    to provide clients with homes that are comfortable and energy efficient. The conventional home

    costs $100,000. The energy efficient home costs $105,000 (stretched for effect, energy efficiency

    typically add 2-3% to the cost of a new home). Both look about the same and have the same

    amenities. The customer will probably be drawn to the home that costs five thousand dollars

    less, but is that their best investment and will they be able to qualify?

    Looking at the table below, we see that the monthly PITI for the energy efficient home goes up

    $33 per month. However, when we compare energy bills, the energy efficient home has $37

    dollar lower utility costs. It costs your clients less each month to own the energy efficient home

    right from day one. Four dollars isn’t exactly winning the lottery, but their mortgage payment

    will remain the same for the next thirty years. Can you guarantee their utility bills will remain

    the same for thirty years? And their positive cash flow will be even greater when you consider

    that mortgage interest is tax deductible and energy costs are not!

    The bigger difference shows up in the income needed to qualify. The conventional house

    requires a monthly income of $3,013, whereas the energy efficient home only requires a monthly

    income of $2,922. That’s over $90 less per month or over $1,100 per year less income needed to

    qualify. Energy Efficient Mortgages open new houses up to more and more people.

    Typical Energy Eff

    HomeComponentHome

    $100,000Home Price$105,000

    $10,000Down Payment$10,500

    $90,000Mortgage Amount$94,500

    8%Interest Rate8%

    30Term (Years)30

    $660Monthly Mortgage Payment$693

    $167Taxes$167

    $17Insurance$17

    $844PITI$877

    $109Monthly Energy Bills$72

    $953PITI+Energy$949

    $3,013Monthly Income Required EEM$2,922

    $36,159Annual Income Required EEM$35,070

     3

Increasing the number of people who qualify to purchase an energy efficient home is one benefit

    of an EEM. Another benefit is qualifying clients for a bigger mortgage. Using the same

    example, if your client had an annual income of $36,159, they would only qualify for a $90,000

    mortgage. However, if the home is energy efficient, the client would qualify for a $98,213

    mortgage. Purchasing power would increase by $8,213. Since the extra cost for energy efficiency

    measures is typically only $2,000-$5,000, they would have an additional $3,000-$6,000 to spend

    on other amenities like a whirlpool tub, a larger kitchen, better flooring, or that enormous deck

    that they want.

    This is great for new homes that are built to be energy efficient, but what about all the existing

    homes out there that are not energy efficient? There is a mortgage product for them also. It’s

    called the Energy Improvement Mortgage.

    Energy Improvement Mortgages

    What is an Energy Improvement Mortgage (EIM)? The EIM was developed by the lending

    industry to give the buyer of an existing home the opportunity to borrow more money at the time

    of sale or refinancing to make their dream home more energy efficient. Again, the lending

    industry recognizes that saving energy reduces the cost of home ownership and frees up more

    money to assist in paying the mortgage, besides increasing the comfort and durability of the

    home.

    The extra dollars borrowed to add additional insulation, replace the old heating/cooling system,

    or tighten the home are rolled into the new mortgage and spread over the mortgage term (usually

    30 years). Let’s look at an example:

    Typical Energy

    HomeComponentImproved

    $100,000Home Price$100,000

    $10,000Down Payment$10,000

    Energy Improvements$4,000

    $90,000Mortgage Amount$94,000

    8%Interest Rate8%

    30Term (Years)30

    $660Monthly Payment$690

    $167Taxes$167

    $17Insurance$17

    $844PITI$873

    $120Monthly Energy Bills$80

    $964PITI + Energy$953

If your client bought the energy improved home, they would have a total monthly housing cost of

    $11 less ($964 - $953) than if they had purchased the typical home. As energy prices rise, they

    will be further “insulated” from the rate increases.

     4

If you were in the market to purchase a home and could get a tighter, more comfortable home

    while paying less each month, what would you do? How would your clients respond to you if

    you helped make that happen for them? Do you suppose they’d tell their friends about you?

    Energy Improvement Loans

    What about those who aren’t purchasing a home, but want to make their existing home more

    energy efficient? What’s available for them? Fannie Mae just launched a new program called

    the Residential Energy Efficiency Improvement Loan program. Fannie Mae has set up the

    program so they can purchase these loans on the secondary market, freeing up local funds. See

    the Fannie Mae Residential Energy Efficiency Improvement Loan flyer in the Fannie Mae section

    of this handbook.

    Setting up an Energy Efficient Financing Program

    Establishing a successful Energy Efficiency Financing program is like designing any new

    successful business. The following are the keys to being successful with Energy Efficiency

    Financing:

    1. Make a Commitment to Energy Efficiency. Make a long term commitment to creating

    a market for energy efficiency homes in Iowa.

    2. Contact Energy Rated Homes Of Iowa. Energy Rated Homes of Iowa (ERHIa) is your

    key contact for establishing an Energy Efficiency Financing Program. ERHIa maintains

    of list of lenders who are willing to process EEMs and EIMs.

    3. Contact Your Local Utility. Many utilities in Iowa, both investor owned, municipals

    and RECs have new construction programs that would qualify participating homes for an

    Energy Efficient Mortgage.

    4. Align Yourself with Trade Allies. Identify those local builders, real estate agents, and

    HVAC contractors who are dedicated to energy efficient housing. These allies will bring

    you new business if they know that you are willing to work with them on promoting

    energy efficiency. Working with the local trade allies will also promote economic

    development for your community.

    5. Set Energy Financing Program Procedures. You need to establish internal policies

    based on the national programs that you plan to participate with. If you are processing

    FHA loans you need to set procedures that follow their guidelines. If you plan to sell

    your mortgages on the secondary market, establish your guidelines according to the

    Fannie Mae or Freddie Mac guidelines. If you plan to keep the mortgages in house, it is

    still a good idea to follow the national guidelines.

    6. Train Staff. To establish a successful Energy Financing Program you must instill a

    degree of enthusiasm in your loan processing staff. They must know why you are

    interested in processing Energy Efficiency Financing loans and most important, they need

    to know how to process the loans. Training of staff is critical to a successful program.

     5

Energy Efficiency Loan Processes

    Providing Energy Efficiency Financing to your clients is not a difficult or cumbersome process.

    There are only a few extra steps required in the loan process. The best part is there are no special

    approvals required by FHA, VA, Fannie Mae, and Freddie Mac and the time required to bring

    underwriters up to speed is minimal. The following steps should get you through the loan

    process with minimal effort:

    1. Locate certified “Energy Raters” that are near your community (a list is provided in the

    back of this handbook).

    2. Make sure that an energy rating and financial analysis of savings is included with the loan

    application process before sending the loan package to the underwriter (there are different

    forms for FHA/VA/Conventional stretch loans).

    3. Obtain normal loan underwriting approvals, internally, and externally.

     6

    FHA Guidelines

The following pages contain copies of FHA/HUD documents that deal with Energy Efficiency

    Financing. The documents included are listed below:

    HUD CIRCULAR LETTER TAM-96-01 - March 14, 1996 Mortgagee Letter 95-46

    Mortgagee Letter 95-40

    Mortgagee Letter 93-13

     7

Report this document

For any questions or suggestions please email
cust-service@docsford.com