A Capital Idea
Research and Commentary on Financial Capital and Its Impact on People and Places
March 19, 2013
Owners of energy-efficient homes one-third less likely to default on their mortgages

"An important way to encourage greater adoption of residential energy efficiency measures is for mortgage pricing or underwriting flexibility to reflect the savings that come as a result of energy efficiency."

Roberto G. Quercia
Director, UNC Center for Community Capital

A new study released today by the UNC Center for Community Capital and Institute for Market Transformation shows the risk of mortgage default is one-third lower for energy-efficient, ENERGY STAR-rated homes – a factor lenders and Congress should consider when making mortgage loans and policy.

Home Energy Efficiency and Mortgage Risks is available online at www.ccc.unc.edu/HomeEnergyEfficiency.php and www.imt.org/resources/detail/home-energy-efficiency-and-mortgage-risks

"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 G. Quercia, the center's director and one of the authors of the study. "Since our study findings now show that energy efficiency is strongly and consistently associated with lower mortgage lending risk, lenders and policymakers have one more reason to promote it."

The study's other authors are Nikhil Kaza, research fellow at the UNC Center for Community Capital and assistant professor in the city and regional planning department, and center research associate Chao Yue Tian.

The new report is the first academic study to assess the linkages between home energy efficiency and mortgage risks. It uses a sample of 71,000 home loans from 38 states and the District of Columbia, all derived from CoreLogic's mortgage database. The sample is restricted to single-family, owner-occupied houses whose loans originated during 2002-2012 and used for purchase only.

About 35 percent of the houses in the sample were ENERGY STAR-rated for efficiency, with the rest forming a control group. Controlling for other factors, the odds of a mortgage default on an ENERGY STAR residence are one-third lower than those of a home in the control group. A mortgage holder on an ENERGY STAR residence is also one-quarter less likely to prepay. Prepayment is considered a risk from the lender's perspective, making the loans potentially more valuable to them. Additionally, the study found that the extent of energy efficiency matters: the greater a house's efficiency, the lower the risk of default.

"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," said Cliff Majersik, executive director of IMT,
a nonprofit organization dedicated to promoting energy efficiency. "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."

The authors recommend that Congress consider the study findings in its deliberation of current and proposed legislation to improve the accuracy of mortgage underwriting. They also conclude that lenders may want to require an energy audit or rating as part of the mortgage underwriting process, and that federal housing agencies could promote underwriting flexibility for mortgages on energy-efficient homes.

American households spend around $230 billion each year on energy, not including transportation, and the residential sector accounts for 20 percent of the total energy consumed in the United States. Energy efficiency in the residential sector has a potential to save $41 billion annually, according to research by McKinsey & Company.


A Capital Idea is published by the UNC Center for Community Capital as a resource for policymakers, advocates and private-sector partners interested in finding sustainable ways to expand economic opportunity to more people, more effectively.

The UNC Center for Community Capital, based in the College of Arts and Sciences at The University of North Carolina at Chapel Hill, is the leading center for research and policy analysis on the transformative power of capital on households and communities in the United States.

UNC Center for Community Capital
(919) 843-2140


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