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    Home Energy Efficiency and Mortgage Risks

    Default risks are on average 32 percent lower in energy-efficient homes, controlling for other loan determinants.

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    In recent years, home energy efficiency has progressed from the margins to the mainstream. Builders large and small are now constructing homes to higher energy efficiency levels. Most importantly, consumers understand that energy efficiency pays for itself over the lifetime of the building through lower heating and cooling costs.

    Despite these trends, the market has not reached its full potential. Financing obstacles prevent many moderate- and middle-income homebuyers and owners from enjoying the benefits of energy efficiency. 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.

     

    Home Energy Efficiency and Mortgage Risks

    Nikhil Kaza
    Department of City and Regional Planning
    University of North Carolina at Chapel Hill

    Roberto G. Quercia

    UNC Center for Community Capital
    Department of City and Regional Planning
    University of North Carolina at Chapel Hill

    Chao Yue Tian

    UNC Center for Community Capital
    University of North Carolina at Chapel Hill

    Introduction
    Over the last few decades, even while houses are becoming more energy efficient, energy costs per household and the total energy used in the residential sector are rising. Many people are living in smaller households but in larger houses, with increasing reliance on space conditioning and appliances, which result in higher energy consumption per household (Kaza 2010). In turn, higher energy costs leave households with less income to meet other needs, such as housing-related expenses. If these trends are going to change anytime soon, greater adoption of energy efficiency
    measures is needed. An important way to encourage such adoption is for mortgage pricing or underwriting flexibility to reflect the savings that come as a result of energy efficiency. Keoleian et al. (2000) argue that while an energy-efficient house recoups any additional premium in sales prices, the mortgage underwriting process does not account for these savings, contributing to lower adoption rates of energy-efficient measures. In this study, we focus on other reasons why the mortgage underwriting process should account for energy efficiency.

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