Green Mortgages

I am working on an interesting project this summer at HUD dealing with green mortgages. A green mortgage is essentially a new mortgage underwriting technique which a borrower can qualify for if the house is energy efficient, healthy, and durable.

Green mortgages require a larger initial investment and a larger loan (up to 15%). This investment will finance green improvements to an existing home or finance the additional costs of building a new home to green standards. However, over the life of a mortgage (15-30 years) the savings from energy and health costs will be substantially more than the increase in your PITI, thus yielding returns that could reach tens of thousands of dollars. Furthermore, since the initial improvement was financed by your mortgage, the returns of your investment are felt immediately as you will be paying less energy+PITI.

Green houses can cut energy costs by up to 50%. It is unknown how much health costs will be reduced by improved air quality.

By factoring in these savings into mortgage underwriting formulas, borrowers can qualify for larger loans. On a macro level, this means that more people can qualify for home loans, the marginal borrower is going to need less total income, and that access to homeownership will improve.

Because mortgage default is so costly to the lender, underwriters must allow a good deal of type II error (false negatives) to make up for the risk of a type I error (false positive - so basically banks deny a lot of applications that would have turned out to be solid investments to overcompensate for the uncertainty of risk). By factoring in energy and health savings into mortgage underwriting, underwriters get a more accurate estimate of a borrowers risk of default and are thus more confident in their assessment. Improved confidence in risk assessment means that more loans will be accepted at the margin, which will primarily benefit low-income households and underserved populations.

Lastly, mainstreaming green mortgages could be useful in the housing climate today. By allowing more people to take out loans, this will shift the demand for housing upwards, driving up price and quantity. By investing in the quality of our homes, houses will be worth more, further driving up price and allowing households to build more home equity.

Notice I haven't made an environmental argument? Thats because it is a good policy even without the added bonus of saving the planet.

So basically Green Mortgages are fucking cool as shit. They literally have zero down-side. Good for lenders, borrowers, good for the economy.