The Wall Street Journal

September 12, 2007

Going Green to Save Some Green

Lenders Push Mortgages With Discounts and Credits For Energy-Efficient Upgrades

By SARA SCHAEFER MUÑOZ

Environmentally conscious homeowners can trick out their homes with a bevy of "green" products, including carpets, windows -- even dog beds. Now, they can pay for those homes with green mortgages.

Lenders are the latest group to jump on the environmental-marketing bandwagon by pitching mortgage products that offer homebuyers bigger loans or discounts if they are making energy-efficient improvements -- or if their new home meets certain efficiency standards. Last month, Citigroup Inc.'s mortgage division launched a program that offers $1,000 off closing costs with its energy-efficient mortgage through the end of the year. Also last month, Bank of America Corp. launched an Energy Credit mortgage, which offers a $1,000 credit toward closing fees for mortgages on new homes that meet efficiency requirements set by the government's Energy Star program. J.P. Morgan Chase & Co.'s mortgage division recently began offering Expanded Energy Conservation Mortgages in some markets that give borrowers more credit, as well as $500 off closing costs, if they find a builder who will use a specific type of spray-foam insulation.

Smaller lenders, too, are promoting energy-efficient mortgages. Indigo Financial Group, based in Lansing, Mich., started selling such mortgages in Michigan, Indiana, Illinois and Florida in 2005, and this year expanded its services into Kentucky and Missouri.

While energy-efficient mortgages have been available from many lenders for some time, they are receiving renewed attention. They allow borrowers to qualify for bigger loans because lenders permit the estimated savings on utility bills to be added to the borrower's qualifying income. For example, energy-efficient improvements could save a homeowner $50 a month. The $600 extra a year could allow a person to borrow about $10,000 more on a 30-year mortgage, depending on the interest rate, says Mark Wolfe, executive director of the Energy Programs Consortium, a Washington, D.C.-based nonprofit that helps coordinate state and federal energy policy.

The new products and incentives are aimed at a market worried about increasingly high energy prices. And amid the turmoil in subprime lending, analysts say, energy-efficient mortgages can be a more secure way to qualify marginal borrowers, since these homeowners are saving money on utility bills.

The energy-efficient products are structured like traditional adjustable or fixed-rate mortgages, yet they incorporate the cost of energy-efficient improvements, such as insulation, windows and cooling systems, into a mortgage so customers can pay these costs over the life of the loan. When customers wish to a buy a home, they have an energy audit done by a certified third party, which evaluates the home and creates a list of energy-efficient improvements that can save the homeowner money on utility bills. The lender -- which will identify a certified auditor -- puts the money needed for the improvements in an escrow account and the improvements are made after the home is purchased.

The products are also available for new construction. Homes that are already energy-efficient can be audited and the amount that is predicted to be saved on utility bills is counted as extra income for the home buyer.

When Gavin and Danielle Craig were looking for their first home in Lansing, Mich., last year, they found a house that dated to 1923 in a nice area. But they quickly realized it would need a lot of improvements, including a new furnace and better insulation. They got a $98,000 energy-efficient mortgage from Indigo, which included $12,000 to make the home more energy efficient.

"We liked the house but wouldn't have been able to afford to fix it up," Ms. Craig says. She says the cost of improvements adds an extra $100 to their monthly mortgage costs, but they save an estimated $2,000 a year on energy bills.

Even though they can save homeowners some money, the mortgages typically haven't generated much interest for several reasons. In the housing frenzy of recent years, the products were rarely marketed, and many consumers didn't know they were available. Meanwhile, an inspection of the home can add several days and extra layers of paperwork to the process. Also, some lenders say that the monthly savings weren't enough to get buyers interested, which is why some banks have been adding incentives such as the $1,000 in closing-cost savings.

Environmental advocates say coaxing people to make changes to their homes that trim energy consumption is important. The residential sector accounts for about 20% of the nation's greenhouse-gas emissions, according to government figures.

States are also subsidizing loans for energy-efficient improvements. Pennsylvania last year started a program that offers low-interest, unsecured financing for energy-related home improvements such as windows, doors, insulation and air-conditioning systems that meet certain criteria. Kansas started a similar program last year. New York state started a loan program several years ago that allows families to qualify for reduced interest-rate loans for up to $20,000. The New York State Energy Research and Development Authority says participation has grown by about 20% this year, and is working on a state-subsidized mortgage pilot program that will be launched as early as next year, says Paul Tonko, the authority's president.

Mark Bartowski, a retired firefighter in Syracuse, N.Y., recently qualified for the New York state loan program. He used the money to help fund the cost of new insulation, and more efficient windows and back door. He says the low interest rate he received through the program saved him about $50 a month, or more than $4,000. He also said he has saved about $20 a month so far on cooling bills.

"I wish I had come across it sooner," he says. "I could have been saving money years ago."

Such products also offer an incentive for builders to build "green," or Energy Star certified homes, if they know there are mortgage products that encourage people to buy them. Some banks also offer similar loans to builders.

Developer Roy Pachecano, the owner of Portico Residential LLC, says such products can help buyers afford his projects, which are speculative homes with energy-efficient materials and retro-fitted historic properties. When dealing with prospective buyers, he makes them aware of the energy-efficient mortgages that are offered.

"As a builder, I need everything that I can find to promote my product, to make it stand out from your average McMansion," he says.

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