Leadership Institute for Ecology and the Economy/Class 2008 Project GREEN HOMES 101: What Are They? Who Wants Them? How to Finance?

Janet Connors, Chris Cone, Jodi Ropert7-3-2010

TABLE OF CONTENTS Green Homes 101: What Are They? Who Wants Them? How to Finance? ............................................................. 1 What Is a Green Home? ......................................................................................................................................................... 1 Energy Efficiency, Renewable Energy, Green Building Features .................................................................... 2 Win-Win Home Improvement ....................................................................................................................................... 3 Who Wants Green Homes? .................................................................................................................................................. 4 Consumer Awareness Summary .................................................................................................................................. 6 How to Finance Green Homes? .......................................................................................................................................... 7 Financing Basics .................................................................................................................................................................. 7 FHA-Insured Mortgages ................................................................................................................................................... 9 Conventional Mortgages .................................................................................................................................................. 9 Portfolio Mortgages ........................................................................................................................................................... 9 Home Equity Loans .......................................................................................................................................................... 10 Specific Energy Efficiency/Renewable Programs .................................................................................................... 10 FHA/VA Mortgage Programs ....................................................................................................................................... 10 Conventional Renovation Mortgages ....................................................................................................................... 13 Home Equity Loans .......................................................................................................................................................... 14 Barriers to Energy Efficiency Financing ...................................................................................................................... 14 Meeting the Need for Energy Efficiency Providers .................................................................................................. 15 Qualified HERS Raters/Project Managers .............................................................................................................. 15 Qualified Home Performance Contractors ............................................................................................................. 16 Conclusions .............................................................................................................................................................................. 17 About the Authors ................................................................................................................................................................. 17

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GREEN HOMES 101: WHAT ARE THEY? WHO WANTS THEM? HOW TO FINANCE? Climate change has focused global attention on ways to reduce greenhouse gas (GHG) emissions produced by use of fossil fuel. One big opportunity for decreasing GHG emissions is our homes. America’s 124 million homes account for 21 percent of the nation’s energy use and greenhouse gas (GHG) emissions, more than cars (20 percent). The vast majority of these homes were built before green building codes; in fact the average age of an American home is 34 years and approximately 60 percent of these same homes will still be occupied in 2050.1 It is clear that homeowners and home buyers have a big opportunity to reduce their energy costs and their GHG emissions by retrofitting their homes for energy efficiency and renewable energy. To turn a standard home into a green home, the homeowner/home buyer needs three things: a home energy analysis identifying all the home’s energy savings/renewable energy opportunities, contractors specializing in home performance/renewable energy, and money to pay for it all. Until very recently all three resources were hard to find, but that is changing. WHAT IS A GREEN HOME? A green home can be new or retrofitted. The home’s “green” status is measured by its GHG emissions, or carbon footprint. That footprint is determined in two ways: (1) by the energy required to operate the home (i.e., heating/cooling, household/electronic appliances, lighting) and (2) by the energy required to harvest, process, manufacture, and deliver building materials and to dispose of building waste. Zero Energy Homes: Zero energy homes (ZEHs) use no fossil fuel for their operation. This possible by capturing all the home’s efficiency opportunities and then adding renewable energy generation to provide the power the home does need. A ZEH can be new or a retrofitted existing home. Energy-Efficient Homes: Energy-efficient homes use energy-efficiency improvements to reduce their carbon footprint as much as possible but are still drawing some power from the utility grid. New Green Homes: New homes have the greatest possibility for achieving “green” status because the builder can use a variety of techniques and technologies to reduce all the GHG emissions associated with home building and operation. Programs such as Leadership in Energy and Environmental Design (LEED) provide guidance on how to build an energy-efficient home and minimize the GHG accrued during home construction. By adding renewable energy generation such as solar electric, solar hot water, and wind, a new green home can achieve ZEH status. Retrofitted Green Homes: The majority of American homes were built before green building practices and ordinances were established. These homes can reduce their GHG emissions with an energy retrofit that includes a home analysis, remediation by contractors trained in energy 1 “Moving Existing Homes toward Carbon Neutrality,” Affordable Comfort, Inc. (ACI) Summit White Paper, November 28, 2007.

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efficiency remodeling, and, if desired, the addition of renewable energy system to offset the post-retrofit carbon footprint of the home. Even the owner or purchaser of an older, existing home can aspire to ZEH status. ENERGY EFFICIENCY, RENEWABLE ENERGY, GREEN BUILDING FEATURES

Energy Efficiency: According to the Climate Protection Campaign’s 2005 Greenhouse Gas Emissions Inventory,2 Sonoma County’s residential, commercial, and industrial buildings account for 47 percent of the county’s total energy use, and therefore GHG emissions; residences as a sector account for 43 percent of GHGs produced by electricity and 67 percent by natural gas. In addition, the typical California residence wastes as much as 40 percent of the energy it uses.3 Why are homes wasting so much energy? Our homes enclose conditioned space that is heated and cooled during the year to provide a comfortable living area. In addition, our homes provide creature comforts in the form of hot water, potable water, and electrical service for lighting, appliances, and entertainment/electronic equipment. All standard energy sources (i.e., electricity, natural gas, and propane) are derived from fossil fuels, the primary source of the leading contributors to global warming: carbon dioxide, methane, and nitrous oxide. Every day as we cook dinner, wash the dishes, water the lawn, or adjust the thermostat our homes are generating a specific amount of greenhouse gases, which is called a carbon footprint. We can reduce our carbon footprint with a home analysis that identifies where our home is wasting energy and allows us to make efficiency improvements that will lower our energy and water bills and our home’s carbon footprint — while improving the comfort and increasing the home’s resale value. This is known as an energy-efficiency retrofit, and even new homes can benefit from a home analysis and remediation of identified problems. Renewable Energy: We can further reduce and even eliminate our fossil-fuel based energy use by adding renewable energy generation such as passive solar, solar electric, solar hot water, and wind. A solar electric system protects against increases in utility electricity rates over the life of the system while generating carbon-free power. Other financial benefits such as the property tax exemption for solar, tax deductible interest, and increased property value make solar a good investment. In addition, energy prices are subject to the pressure of supply-and-demand and world affairs. By conserving energy and implementing renewable energy generation such as solar and wind, we can minimize the impact of rising energy prices on our household budgets and get the maximum reduction in our home’s carbon footprint. Green Building Features: As builders and consumers look for more ways to reduce greenhouse gas emissions, green building features are becoming more important in new homes and in the renovation of older homes. Green building improvements include features such as low volatile- 2 “Greenhouse Gas Emission Inventory for All Sectors of Sonoma County, California,” Climate Protection Campaign, January 2005. 3 California Building Performance Contractors Association, http://www.cbpca.org/homeowners/energy.html

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organic-compound (VOC) paints and finishes; toxic-free furniture; renewable building materials such as bamboo floors; recycled building materials including reclaimed wood, recycled steel, and decking material made from recycled plastic bottles; and locally available building resources, as well as recycling of building/remodeling waste. Each feature contributes to the home’s green profile by either reducing the amount of chemicals in the home, eliminating the high cost of original manufacture (recycled wood/steel), promoting renewable building resources, reducing the fossil fuels required to ship materials over long distances, or recycling building waste. WIN-WIN HOME IMPROVEMENT

Pay-As-You-Save: An energy-efficiency retrofit is the only home improvement project that pays for itself now, and is not dependent on the real estate market to recoup costs upon resale as are traditional home upgrades such as kitchen and bathroom remodels. The value of the energy savings increases as fossil fuel resources become more costly and harder to obtain. More Buying Power: Reducing the operating costs of the home means more income is available for other expenses. This “extra income” is not lost on mortgage lenders who can use FHA programs to apply the value to stretch the income total of home buyers purchasing already energy efficient homes or apply it to the cost of retrofitting an energy-wasting home. More Comfort, Healthier Home: Energy efficiency improvements not only reduce the energy bills, they also make the home more comfortable and improve the indoor air quality/living environment. Clean Power Generation: Adding renewable energy generation creates clean power, protects against utility electricity rate increases, and has the potential to become an income-producing venture under PG&E’s new power purchase agreement program. Green Building Features: Green building features have the potential to add value to and buyer interest in a home as consumer demand grows. Increased Property Value: Reducing a home’s operating costs through efficiency, adding renewable power generation, and including green building features all have the potential to increase a home’s resale value.

Resale Value Comparisons of Various Home Improvements

Home Improvement Type Investment Amount/Net System Cost

Resale Value Increase % Return 4.3-kilowatt photovoltaic system, CA $23,000 $22,000 95%9.4-kilowatt photovoltaic system, CA $48,000 $77,000 160%Deck addition $6,300 $6,700 104%Bathroom remodel $10,100 $9,100 89%Window replacement $9,600 $8,200 85%Kitchen remodel $44,000 $33,000 75%Analysis based on data from Remodeling Online’s 2003 survey.Source: “What’s the Payback?” Andy Black, Solar Today Magazine

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WHO WANTS GREEN HOMES? Consumers are quickly becoming aware of green homes: According to The Green Homeowner SmartMarket Report by McGraw Hill4 with support of the National Association of Home Builders (NAHB), consumer awareness of green homes is building rapidly. Even so, real estate, lending, and building professionals still have a ways to go in terms of educating consumers. General consumer awareness of “green” homes is quite high — in fact, only 3 percent of the survey participants claimed to be “not at all aware,” while 45 percent claim to be either very knowledgeable or extremely knowledgeable.

Word of mouth is driving consumer awareness: Consumers are primarily hearing about green homes via word of mouth (28 percent) and television (20 percent). Interestingly, contractors and builders are the source of green home information only 8 and 2 percent of the time respectively, which is a potential missed opportunity.

4 For more report information, visit: http://greensource.construction.com/resources/smartMarket.asp

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Key motivating factors behind purchase of a green home: Consumers are motivated by cost savings, environmental concerns, and occupant health. It is important to note that these “ethical” considerations (i.e., environment and health) are nearly as important as operational cost savings. Thus, in marketing green homes, it is essential to tap into these emotional, value-based benefits in addition to hard cost savings.

Green homeowner satisfaction and recommendation is exceedingly high: Over 85 percent of respondents are either “much more” or “more” satisfied with their green home versus a non-green home. Additionally, 85 percent are “highly likely” or “likely” to actively promote and recommend green homes. These data suggest that the installed base of green homeowners is a powerful opportunity for marketers. Since consumers are learning about green homes today primarily through word of mouth, this satisfied customer base has great potential to further the consumer awareness, education, and ultimately demand for green homes.

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Lack of education, lack of availability and cost are important purchasing barriers: In order for green homes to become mainstream, the market must surmount all three of these challenges: consumers need more education and information to understand their options, green homes must become much more available, and green homes must be affordable.

CONSUMER AWARENESS SUMMARY In summary, consumer awareness of green homes is developing rapidly, but consumers need more education, more availability of green homes, and cost-efficient green alternatives in order for green homes to become truly mainstream. In order to grow the consumer demand, there are a number of unmet opportunities today. First, most consumers are not getting information from builders or contractors regarding green options — this is a clear opportunity for growing this market in the future. Second, because consumers gain most of their information from word of mouth, as noted above, the installed base of satisfied green home owners is a very important asset for builders, realtors, and governments to increase awareness and desire for green homes. Finally, it is essential for any consumer marketing or outreach program to recognize that the “ethical” considerations are as important as cost. Thus any marketing should emphasize not only the cost benefits, but also play up the environmental and health benefits of green homes. Specific marketing recommendations to grow consumer demand for green homes: 1. Builders and contractors are a relatively untapped source to build awareness and education for consumers. Builders/contractors should leverage opportunities to provide green alternatives to their customers, and to educate customers about the benefits of going green. 2. Existing green homeowners should be used to drive positive word of mouth and awareness into the broad consumer marketplace. Testimonials, case studies, and real world experiences are an effective way to help consumers become more aware, educated, and excited about green homes.

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3. Marketers should emphasize the health and environmental benefits of green homes in addition to the cost benefits. Consumers care both about the hard logical benefits (cost) as well as the more emotional softer benefits (environment, health). Emotional territory such as the environment and personal/family health creates profound marketing potential, where marketers can really speak to consumers’ values and emotions, in addition to their more calculated, cost-conscious sides. HOW TO FINANCE GREEN HOMES? FINANCING BASICS Current green home financing options focus primarily on energy efficiency. Funding is available through mortgages for home purchase or refinance and through home equity loans. Whether buying or retrofitting a green home, the homeowner works with a team of professionals to acquire the necessary funds and energy retrofit resources including a real estate agent (home purchase only), lender/appraiser, and energy retrofit team consisting of a home energy analyst (HERS rater), project manager, and home performance and renewable energy contractors (see diagram below).

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HOME PURCHASE ONLY Real Estate Agents: The real estate industry is developing voluntary green certification programs that equip real estate agents to inform home buyers on the green features and energy-efficiency performance of homes on the real estate market including Sonoma County-based EcoGreen Real Estate Agent Certification Program (http://www.ecogreenrec.com/) and EcoBroker International (http://www.ecobroker.com/ ).5 HOME PURCHASE AND REFINANCING Lenders: Financing for energy efficiency is primarily available through the Federal Housing Administration (FHA). FHA mortgages are available from FHA-approved lenders; see FHA-Insured Mortgages section on next page for more details. To obtain a list of qualified FHA lenders in your area, visit http://www.hud.gov/offices/hsg/fhahistory.cfm . In addition, there are some convention renovation mortgage options that may be used for energy efficiency retrofits (see Conventional Renovation Mortgages section below). Appraisers: Appraisers traditionally provide the lender with a property value estimate based on the resale value of other similar properties in the community/neighborhood. Because there is very little resale data on new green homes and retrofitted green homes, appraisers do not have a sufficient track record to consult for determining the market value of energy efficiency features. Therefore, energy efficiency or “green” value is not typically included in a home appraisal at this time. Energy Retrofit Team: To evaluate a new green home or retrofit an existing home, the homeowner needs an energy retrofit team. • Home analyst or Home Energy Rating System (HERS) rater who inspects and tests the home to identify its energy saving opportunities; with this analysis the homeowner knows exactly what needs to be done and the estimated costs and energy savings for each item. (New and existing retrofit projects.) • Project manager assists the homeowner/home buyer with the paperwork and contract/work completion deadlines attached to the mortgage. This project manager can be an independent third party, the HERS rater, the contractor, or the lender. (New and existing retrofit projects.)

• Home performance/renewable energy contractor(s) provides the energy retrofit services (e.g., building shell sealing, insulation upgrades, heating/ventilation/air condition system upgrades) and renewable energy system design/installation according to the goals and budget of the homeowner. (Retrofit projects only.)

5 Green homes may be located through an online service called Listed Green®: The MSL for Green, Sustainable, Energy Efficient Properties (http://www.listedgreen.com/ ). Listed Green is a third-party green internet advertising platform for buyers and sellers of green homes. Listings include information on utility costs and efficiency features for each home.

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FHA-INSURED MORTGAGES Currently, financing for energy efficiency is available primarily through lenders who participate in the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) and Veterans Administration (VA) mortgage insurance programs, which are designed to assist first-time and low-to-moderate income home buyers, and homeowners interested in refinancing; however, there are no income limits and the program is open to all applicants. The FHA mortgage insurance programs make it easier to qualify for a mortgage, allow a lower down payment, and often have competitive interest rates because they are insured by the government. The FHA mortgages use a debt-to-income6 (DTI) ratio of 28 percent; conventional mortgages use a debt-to-income ratio of from 37 to 42 percent. Under the FHA’s Rehabilitation 203(k) program, the lender may lend up to 97 percent loan-to-value7 (LTV). In addition FHA mortgages may not exceed a mortgage limit that is determined by the property’s location by state and county. The FHA recently increased the mortgage limit; Sonoma County’s limit is currently $662,500. To obtain FHA mortgage cap information for your area, visit: https://entp.hud.gov/idapp/html/hicostlook.cfm CONVENTIONAL MORTGAGES Convention mortgages are available through renovation loans such as the Wells Fargo Renovation, Fannie Mae HomeStyle Renovation, and Freddie Mac Renovation mortgage programs. These types of loan rely on selling the loan to the secondary market to allow the lender to offer competitive interest rates. Conventional mortgages use loan-to-value and debt-to-income calculations (usually 37 to 42 percent debt-to-income) to determine the risk of the loan. These loans general will lend up to 95 percent of the loan-to-value ratio to the conforming loan limit.

PORTFOLIO MORTGAGES Sometimes local lenders will issue mortgages for single-family residences. These portfolio loans usually meet underwriting guidelines set by the secondary market, but because the lender does not sell the mortgage to the secondary market, they can offer a higher debt-to-income ratio that reflects the lower operating cost of an energy-efficient home. However, portfolio loans usually have higher interest rates and the fixed-interest loan term is from three to 10 years, not 30 as for a conventional loan.

6 “Debt-to-income” or DTI means the annual mortgage payments must not exceed a designated percent of annual household income; in these case 28 percent. 7 “Loan-to-value” or LTV means the loan may not exceed at designated percent of the value of the property; in this case the lender will lend up to 97 percent of the value of the property.

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HOME EQUITY LOANS Homeowners who wish to improve the energy efficiency of their homes independent of a real estate transaction may use any of the previously mentioned mortgage vehicles or they may use their home equity. Home equity financing is the simplest financing option. There are no official home analysis requirements, although obtaining a home analysis is highly recommended; the amount of the loan is only limited by the available equity and project scope; there are no work-completion deadlines so the homeowner can proceed at his/her own pace; and most lenders offer both home equity lines of credit (HELOC) and amortized loans. In addition, the interest on the loan is tax deductible, in most cases. SPECIFIC ENERGY EFFICIENCY/RENEWABLE PROGRAMS FHA/VA MORTGAGE PROGRAMS Home buyers have access to a federal program called the Energy Efficiency Mortgage (EEM) program, which has been available since 1987. The program is administered by the Federal Housing Administration (FHA) and the Veterans Administration (VA) to help first-time home buyers and moderate-to-low income home buyers. EEMs only fund the energy efficiency upgrades whose savings potential is greater than their cost. In addition, EEMs will finance up to 100 percent of the energy package costs. In June 2009, HUD released Mortgagee Letter 2009-18, which provides new criteria for determining the EEM amount. The maximum amount of the portion of the EEM for energy improvements is:

• The lesser of 5 percent of the value of the property or • 115 percent of the median area price of a single family dwelling or • 150 percent of the conforming Freddie Mac limit8 There are two tracks: the first uses the estimated energy savings resulting from the purchase of a new energy-efficient home as a basis for increasing the home buyer/homeowner income figure; the second uses a post-renovation “as-completed” appraisal of the home to determine the increased property value resulting from the proposed home improvements, including energy efficiency upgrades. There are two types of EEMs: the Energy Efficiency Mortgage for new construction or new energy-efficient homes and the Energy Improvement Mortgage for older homes that need an energy retrofit. Residences with from one to four units are eligible for EEMs, which can be added to a first mortgage for home purchase or refinance. In addition, the interest on EEMs is tax deductible.

8 “Energy Efficient Mortgages — Increase in the Dollar Amount of Energy Efficient Improvements,” Mortgagee Letter 2009-18, U.S. Department of Housing and Urban Development, June 10, 2009.

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ENERGY EFFICIENCY MORTGAGE EEMs are designed for the construction or purchase of a new, already energy-efficient home. The amount of the energy savings realized by the energy efficient features of the home are counted as “extra income” and allow the home buyer to qualify for a larger mortgage. The amount of the “extra income” is determined by a Home Energy Rating System (HERS) analysis of the home by a certified HERS rater, which identifies and rates the home’s energy saving performance according to a national standard.

Energy Efficient Mortgage Example for New Homes, New Construction For a standard home without energy improvements:Buyer’s total monthly income $5,000 Maximum allowable monthly payment 29% debt-to-income ratio: $1,450 Maximum mortgage at 90% of appraised home value: $207,300 For an energy-efficient home: Buyer’s total monthly income $5,000 Maximum allowable monthly payment 33% debt-to-income ratio: $1,650 Maximum mortgage at 90% of appraised home value: $235,900 Added borrowing power due to EEM $28,600 Mortgage rate of 7.5 percent, down payment of 10 percent, 30-year term, principal and interest only, tax and insurance not factored. Source: Federal Citizen Information Center, Energy Efficient Mortgage Home Owner Guide ENERGY IMPROVEMENT MORTGAGE EIMs are designed for the purchase of a home that has not been retrofitted for energy efficiency. These mortgages require a three-step process: 1. Obtain HERS Rating: Home buyer must obtain a Home Energy Rating System (HERS) analysis of the home by a certified HERS rater. HERS raters use a national system of home analysis to identify the energy-saving opportunities in the home that remedy inefficiencies such as air leakage in the building shell; poorly installed or missing insulation; an inefficient or poorly designed heating, ventilation, and air conditioning (HVAC) system; out-dated, inefficient appliances; single-paned windows; and old lighting fixtures. The HERS report estimates the cost and energy savings value of the recommended upgrades; the report is submitted to the mortgage lender who uses it to determine the dollar amount to be added to the mortgage. 2. Sign Vendor Contract: Before the close of escrow, the home buyer must sign a contract with a qualified contractor who will implement the approved energy retrofit upgrades. 3. Verify Work Completion: The new homeowner must complete the energy retrofit work within three months of the close of escrow. As with a construction loan, the contractor is paid by the lender and only when the work is finished.

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Energy Improvement Mortgage Example for Efficiency Retrofit of HomesHome price (90% mortgage, 8% interest); EEM fund = $4,816 $150,000 $154,816Loan amount $135,000 $139,334Monthly payment* $991 $1,023Energy bills +$186 +$93The true monthly cost of home ownership $1,177 $1,116

Monthly savings - $61*Estimated mortgage payments are based upon principle and interest only, and do not include taxes and insurance. Values indicated here are for example only, and will vary from home to home. Source: Federal Citizen Information Center, Energy Efficient Mortgage Home Owner Guide U.S. Department of Housing and Urban Development: Mortgagee Letter 2005-21 WEATHERIZATION MORTGAGE This is an energy-efficiency program offered through the U.S. Housing and Urban Development (HUD) department. This program allows the home buyer to add up to $5,000 to the mortgage for specific weatherization upgrades including: programmable thermostats, insulation wrap for water heaters, insulation of ducts and pipes in unheated spaces of heating/cooling systems, attic insulation, insulation of floors and foundation walls, installation of weather-stripping and caulking, and installation of storm windows and doors. Requests for an additional amount of $3,501 or more require an onsite inspection by a HUD-approved appraiser, inspector, or Direct Endorsement staff appraiser. The added weatherization amount must be included in the total mortgage limit allowed under the HUD program. The home buyer/homeowner must also provide additional down payment funds for the weatherization portion of the mortgage package. U.S. Department of Housing and Urban Development: Weatherization HUD Handbook 4150.1 REV.-1 REHABILITATION 203 (K) MORTGAGE PROGRAM This program allows home buyers and homeowners to add the cost of home rehabilitation improvements to the mortgage amount. The total mortgage amount on the property, including the cost of the repairs, must fall within the FHA mortgage limit for the area. The loan is based on improved value of the property or purchase price plus the cost of repairs, whichever is less. The lender will lend up to 97 percent loan-to-value under this program. This program helps home buyers and homeowners use a single mortgage loan to rehabilitate properties that are at least one year old. The cost of the rehab must be at least $5,000 and the total mortgage amount on the property, including the cost of repairs, must fall within the FHA mortgage limit for the area. The rehab can range from minor upgrades to near total reconstruction. The types of improvements include energy efficiency upgrades.

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If the total cost of the rehabilitation including energy efficiency upgrades is less than $35,000, the loan will be eligible for the Streamlined 203(k) program (see below). The FHA Section 203(k) rehabilitation mortgage insurance program offers the following energy efficiency/renewable energy financing options: • Minimum Energy Efficiency Upgrades: Each 203(k) renovation must include a minimum of energy efficiency upgrades including weather stripping doors/windows, caulking the building envelop, insulating the exterior walls, ventilating the attic and crawlspace, insulating the duct supply/return systems in unconditioned spaces, and resizing of oversized heating/cooling systems, as well as installation of smoke detectors. • Solar Energy Increase: The mortgage is eligible for an increase of up to 20 percent the maximum insurable mortgage amount if such an increase is necessary for the installation of solar energy equipment. • Energy Efficient Mortgage (EEM) Program: The EEM program allows the home buyer/homeowner to add to the mortgage 100 percent of the cost of the eligible, “cost-effective” energy improvements. STREAMLINED (K) LIMITED REPAIR PROGRAM This HUD program provides purchase and refinancing mortgages that add up to $35,000 for homes that need moderate repair and rehabilitation. It may be used to augment the FHA Energy Efficient Mortgage (the Streamlined funds may be added to EEM funds). The Streamlined (k) program allows 15 repair/replacements options including energy-efficiency items such as weatherization upgrades (storm windows/doors, insulation, weather-stripping, etc.), purchase and installation of new appliances (free-standing ranges, refrigerators, washer/dryers, dishwashers, and microwave ovens), and basement waterproofing. For repair/replacement costs under $15,000 the homeowner may submit a contractor’s cost estimate; for repair/replacements over $15,000, the homeowner must obtain an onsite work-completion-verification inspection by a third-party. Streamlined (k) Limit Program funds may be combined with EEM funds and Weatherization funds up to $2,000. U.S. Department of Housing and Urban Development: Mortgagee Letter 2005-50

CONVENTIONAL RENOVATION MORTGAGES Homeowners who do not have sufficient equity to qualify for a home equity loan can consider refinancing with a renovation mortgage. These mortgages are similar to a construction loan and are intended to assist homeowners with home improvements. The homeowner is required to have a contract with a licensed general/home performance contractor before the close of escrow and the work must be completed with six or six-to-nine months after closing depending on the loan amount. The following are renovation mortgage programs: • Wells Fargo Renovation Loan Program: Wells Fargo’s renovation loan is a hybrid of a regular mortgage and a construction loan. They will accept an energy-efficiency retrofit as a home

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improvement project and will lend up to 95 percent of the “as completed” appraised value of the home. • Fannie Mae HomeStyle Renovation Mortgages: The Fannie Mae HomeStyle Renovation program offers fixed-rate mortgages from 15 to 30 years or an adjustable rate mortgage (ARM) for 30-years that roll the renovation costs into the first mortgage. The borrowed money can cover any renovations as long as they are permanently part of the property and add value to it. The added amount is based on the costs of the renovation or the “as-completed” value of the home after the renovations are completed. The mortgage limit for Fannie Mae is $417,000. The program will allow second mortgages for homeowners and investors, as well as owner occupied. • Freddie Mac Renovation Mortgages: The Freddie Mac program is for home buyers or homeowners who want to repair, restore, rehabilitate, renovate, or make additions to an existing home. The program offers fixed-rate and ARM financing. FHA mortgages are not eligible. The mortgage limit for Freddie Mac is $417,000. The program will allow second mortgages for homeowners and investors, as well as owner occupied.

HOME EQUITY LOANS In Sonoma County, the nonprofit Green Energy Loan program (www.greenenergyloan.org ) offers home energy analysis/report services and access to home equity financing with five local lenders: First Community Bank, Exchange Bank, North Coast Bank, Sonoma Bank, and Summit State Bank. BARRIERS TO ENERGY EFFICIENCY FINANCING The following are barriers to homeowner/home buyer participation in energy efficiency financing: 1. Lack of knowledge about the financial, comfort, and health benefits of an energy-efficiency/renewable energy retrofit 2. Lack of knowledge about financing options 3. Lack of lending industry consensus on how to value energy-efficiency/renewable energy improvements in order to determine their value in the marketplace and financing calculations 4. Confusion about and resistance among to the paperwork required to fulfill EEM requirements for HERS rating and contractor bid/contract steps 5. FHA mortgage limits that make it difficult for moderate-to-well-off home buyers to use in high-end markets 6. Lack of access to EEM project managers who can facilitate the home analysis, mortgage application, and work completion

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7. Lack of access to qualified home analysts who can provide an easy-to-use report summarizing the home’s energy savings opportunities and an estimate of the cost and energy savings for each recommendation that can be used as a planning tool for financing and implementation 8. Lack of trained, qualified home performance contractors who can ensure the implementation of the energy-savings recommendations yields verifiable energy savings, as well as comfort and improve indoor air quality MEETING THE NEED FOR ENERGY EFFICIENCY PROVIDERS Whether purchasing a home or retrofitting an existing home, the homeowner/home buyer needs four things: 1. A knowledgeable real estate agent who can recommend a qualified mortgage professional to assist with energy efficiency financing 2. An informed mortgage professional with knowledge of energy efficiency mortgage options or lender with a competitive home equity product 3. A qualified certified HERS rater (and project manager for EEM programs) and a home analysis report to quantify value of energy savings and assist in making financing decisions 4. A qualified certified home performance contractor to provide a project cost estimate for appraisal evaluation and perform energy retrofit tasks QUALIFIED HERS RATERS/PROJECT MANAGERS Until recently, HERS raters were trained and certified primarily for commercial building evaluation and new construction compliance with California energy code Title 24. Now four major building performance organizations are offering or will soon be offering professional training in “existing-home” energy analysis based on the national HERS protocols. This development means home owners, real estate agents, and mortgage brokers will have more qualified, certified HERS providers to call upon. In addition, some of these organizations also provide training and certification for home performance contracting, the efficiency industry’s state-of-the-art protocols for energy-efficiency retrofits and new construction. These organizations are:

• California Home Energy Efficiency Rating Services, Inc. (CHEERS) is a nonprofit energy analyst training/certification group. CHEERS just launched its Existing-Home Energy Rating training and will soon debut an EEM Project Manager training. This means that energy professionals will be able to obtain education in how to provide the two services essential to EEMs: the existing-home HERS analysis/report and the project management service. No other trade group currently provides training for the project management service. The stand-alone EEM project management service will likely become available through several sources including independent third-party HERS raters, contractors, real estate agents, and mortgage brokers. One possible scenario is that real estate agents and mortgage brokers may provide the project management service in partnership with existing-home HERS raters.

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• Build It Green is a nonprofit trade group dedicated to promoting green building practices. They are developing a new home energy analyst training for existing homes for their GreenPoint Rater program. • California Building Performance Contractors Association (CBPCA) and the

Building Performance Institute (BPI) are nonprofit trade groups providing training and certification for home performance contractors, the companies that will provide the contracting services for energy efficiency retrofits. BPI offers a certification program for home analysis and construction. • U.S. Green Building Council is a nonprofit trade group dedicated to promoting green building and the originator of the Leadership in Efficient and Environmental Design (LEED) program that sets national standards for new construction. They are also working on an existing homes LEED program.

QUALIFIED HOME PERFORMANCE CONTRACTORS How energy efficiency upgrades are implemented makes a big difference in how much you decrease your utility bills while increasing the safety and comfort of your home. A “home performance” contractor is trained in whole-house remediation and uses test equipment to confirm the results of their efficiency work and ensure healthy indoor ventilation and safe performance of gas appliances. Using a systematic whole-house approach is important because a house includes three interdependent systems that each contribute to the home’s ability to provide shelter, comfort, and a safe indoor environment. These systems include: (1) an air barrier (that prevents air from leaking into or out of the home), (2) a thermal barrier (that keeps heat inside during cold weather and outside during hot weather), and (3) a heating, ventilation, and air conditioning (HVAC) system (including furnace, air conditioner, and duct system that provide a stable indoor air temperature). Making improvements to one system affects how the other systems function. A qualified home performance contractor uses test equipment including a blower door (creates pressure difference between inside and outside for detecting air leaks), an infrared camera (detects gaps in wall, ceiling, and floor insulation), a duct blaster (pressurizes the duct system to identify the location of leaks), and a carbon monoxide detector to monitor and confirm air and duct sealing measures, identify insulation upgrade opportunities, confirm proper indoor ventilation, and ensure safe operation of gas appliances such as furnaces and hot water heaters. Addressing the energy performance of the home as a whole system allows the home buyer/homeowner to achieve maximum energy efficiency while improving your comfort.

Green Homes 101

17

CONCLUSIONS To effectively retrofit our existing housing stock for energy efficiency and renewable energy we need to develop the following: • New financing products that include the value of the energy savings and renewable energy generation • New financing products that structure the loan payments on the realized energy savings to avoid or minimize the out-of-pocket expense for the homeowner/home buyer • Comprehensive and universal home energy analysis protocols and software that allows the home analyst to determine the home’s base energy status and prescribe a range of energy efficiency measures from short-term “biggest bank for the buck” to long-term ZEH investment options (to provide a complete green home planning tool for the homeowner/home buyer). • Trained/certified home performance contractors and HVAC specialists to provide the retrofit services • An independent third-party test-in/test-out system to determine energy waste baseline and verify retrofit home performance • Curriculum in high school and two/four-year colleges to train the green building and solar professionals needed to meet the new construction and retrofit demand. ABOUT THE AUTHORS This paper presents the results of research conducted by Janet Connors, Senior Vice President, First Community Bank; Chris Cone, Chris Cone Consulting; and Jodi Ropert, co-owner Barefoot Homes, for a class project on energy efficient/green home financing options for homeowners and home buyers for the 2008 Sustainable Leadership Training at the Leadership Institute for Ecology and the Economy. Special thanks to Katie Orr of First Priority Financial for her review of the mortgage details.

August 1, 2008, Version 3.1

8/27/2008 Green Home Financing Team

Real EstateTeam:

Real Estate Agent

EnergyTeam:

Project Manager

FinancingTeam:

Mortgage Broker

RenovationTeam:

Home Perform.g j gHERS Rater

Mortgage BrokerEscrow AgentAppraiser

FHA Consultant

ContractorSolar Contractor

GREEN HOME:Home Buyer

GREEN HOME:1. Low Utility Bill2. Renewable

Energy

The Goal:Make "energy renovation" (efficiency/renewables)

the #1 home improvement project in Sonoma County.Home Owner

ER Fi i R ti

3. Green BuildingMaterials

the #1 home improvement project in Sonoma County.

EnergyTeam:

Project ManagerHERS Rater

Re FinancingTeam:

Mortgage BrokerEscrow AgentAppraiser

RenovationTeam:

Home Perform.Contractor

Solar ContractorAppraiserFHA Consultant

Energy Efficiency Mortgages/Rehabilitation 203(k) Mortgages available through the Federal Housing Administration (FHA) include energy renovation funds.Cli i C i (C C) G h G (G G) i i d i G l 2 b l 990 l l b 20Climate Protection Campaign (CPC) Greenhouse Gas (GHG) Emission Reduction Goal: 25 percent below 1990 levels by 2015.Residential/commercial/industrial buildings use 47 percent of Sonoma County's total energy demand (CPC 2005 Greenhouse Gas Emissions Inventory).Of Sonoma County's total energy use, residences use 43 percent of the electricity and 67 percent of the natural gas (CPC 2005 Greenhouse Gas Emissions Inventory).California homes typically waste as much as 40 percent of the energy they use, according to the California Building Performance Conctractors Association.

Sponsored by Chris Cone/Chris Cone Consulting, Janet Connors/First Community Bank, Jodi Ropert/Barefoot Natural Homes,Sharon Ledbetter/Eco Green Certification Program and Century 21 Alliance, and Katie Orr/First Priority Financial

Green Home Financing: Mortgage Add Ons Step by StepEnergy Efficient Mortgage / Weatherization Mortgage / Solar Increase Mortgage

HOME BUYER HOME OWNER

Real EstateTeam

EnergyTeam

FinancingTeam

RenovationTeam

Mortgage BrokerProvides EEMFHA/VA loanProvides Weatheri

Project Manager*Communicates directly with homebuyer/home ownerCommunicates directly with HERS rater

Home PerformanceContractor

Seals building shellUpgrades insulation

Real Estate AgentProvides info howto improve home'sgreen features/

zation FHA/VA loanProvides solarincrease on FHAloans

Escrow Agent HERS Rater

Handles all EEM paperwork for lenderFacilitates escrow contract deadlineFacilitates 3 month renovationdeadline

Upgrades HVACOther efficiencyimprovments

Solar Electric

energyperformanceProvides greenmortgageresources

Escrow AgentHolds add on funds

HERS RaterPeforms onsite home energy efficiencyanalysisPrepares HERS report with energysavings/upgrade cost amountsPlays role similar to appraiser by

Contractor

Solar Hot WaterContractor

GREEN HOME1. Low Utility Bill2. Renewable Energy3 G B ildi M t i l

Plays role similar to appraiser byevaluating value of energy savings

3. Green Building Materials4. Low to No Carbon Footprint

* Project manager can be HERS rater, mortgage broker, or home performance contractor.

2008 © Chris Cone Consulting / cone@sonic.net / (707) 889 1328

Green Home Financing: Renovation Loan Options Step by StepFHA 203k or Fannie Mae HomeStyle

HOME BUYER HOME OWNER

Real EstateTeam

EnergyTeam

FinancingTeam

RenovationTeam

Mortgage BrokerGuides entire loan processAdvises on EEM/"solarincrease" additionsDetermines best loan type(EEM FHA 203k F i M )

Project Manager* (Optional)Deals with energy efficiency onlyCommunicates directly with homebuyer/home ownerCommunicates directly with HERS rater Home Performance

Real Estate AgentProvides info howto improve home'sgreen features/energy

f

General ContractorOversees entirerenovation

(EEM, FHA, 203k, Fannie Mae)

HERS Rater (Optional)Peforms energy efficiency analysisPrepares HERS report with energysavings/upgrade cost amounts

Assists with contracting reno provider Sub ContractorSeals building shellUpgrades insulationUpgrades HVACOther efficiency

performanceAssists home buyerto identifyrenovation wishesPrepares feasibiliyor comp analysis of

FHA Consultant ($35K+ budgets)Evaluates initial cost estimatesInspects renovation workRenovation work may include

AppraiserEstimates improved value

savings/upgrade cost amountsimprovments

Solar ElectricSub Contractor

Solar Hot Water Sub

or comp analysis ofwish list items

Renovation work may includemore than minimum requiredweatherization items

GREEN HOME1. Low Utility Bill2. Renewable Energy

Estimates improved valueContractor

3. Green Building Materials4. Low to No Carbon Footprint* Project manager can be HERS rater, mortgage broker, or home performance contractor.

2008 © Chris Cone Consulting / cone@sonic.net / (707) 889 1328

Green Home Financing: Other Options

HOME BUYER HOME OWNER

Real EstateTeam

EnergyTeam

FinancingTeam

RenovationTeam

Lender/BankerProvides homeequity financing(HELOC), (2ndmortgage loan)

Project Manager* (Recommended)Communicates directly with homebuyer/home ownerCommunicates directly with HERS raterAssists with finding qualified renovation

Home PerformanceContractor

Seals building shellUpgrades insulationUpgrades HVAC

Real Estate AgentProvides info howto improve home'sgreen features/energy

HERS Rater (Recommended)Peforms onsite home energy efficiencyanalysis

contractorsFacilitates renovation schedule/work

Other efficiencyimprovments

Solar ElectricContractor

performanceProvides info onhome equityresources and/orcredit cardfinancing options

Credit Card ProviderProvides credit line

analysisPrepares HERS report with energysavings/upgrade cost amountsPlays role similar to appraiser byevaluating value of energy savings

Solar Hot WaterContractor

financing options

GREEN HOME1. Low Utility Bill2. Renewable Energy2. Renewable Energy3. Green Building Materials4. Low to No Carbon Footprint

* Project manager can be HERS rater, mortgage broker, or home performance contractor.

2008 © Chris Cone Consulting / cone@sonic.net / (707) 889 1328