Last week, Freddie Mac released a new study, entitled "Energy Efficiency: Value Added to Properties & Loan Performance," to provide insight on how lenders may be able to factor energy-efficiency rating systems into the mortgage underwriting process. The study tracked property sale prices and loan default rates to explore if energy-efficient features could increase home value and provide less financial stress to owners based on decreased utility costs.
The study focused on homes that utilized two different energy-efficiency rating systems: the Home Energy Rating System (HERS) Index by the Residential Energy Services Network (RESNET), and the Home Energy Score (HES) by the Department of Energy (DOE). The HERS-rated homes represented primarily new construction, while the HES-rated homes were more likely existing homes. Each rating system provided Freddie Mac a list of homes rated between 2013 and 2017. Approximately 10% of those homes were used for Freddie Mac’s national random sampling.
Freddie Mac partnered with a major credit bureau to obtain information on unrated homes for comparison on home performance and sales prices, as well as anonymous financial data to compare borrower characteristics and default rates for loan performance. Researchers took into account factors such as the square footage of the home, age of the home, and geographic location to ensure good comparisons were made. For buyers, characteristics included age, education level, income based on local area median income, and debt-to-income (DTI) ratio.
Key findings from the report included:
- Property value analysis rated homes sold for 2.7% more than comparable unrated homes.
- Better-rated homes sold for 3-5% more than lesser-rated homes.
- From the loan performance analysis, the default risk of rated homes is equivalent to unrated homes, once borrower and underwriting characteristics are considered.
- Loans in the high debt-to-income (DTI) bucket (45% and above) with ratings, however, appear to have a lower delinquency rate than unrated homes.