We’ve spoken in previous posts about programs and initiatives on the horizon that may give the market for energy efficient home upgrades a much needed push forward. We’ve also spoken about the absence of certain market dynamics and the need to fill this void with innovative solutions. One such example is the need for dedicated financing solutions for energy-saving home ugprades.
The truth is, financing an energy efficient home upgrade – or a home retrofit as it is sometimes called – should be a win-win for both the homeowner and the lender. From the homeowner’s perspective, the right upgrades can save them energy and money, while at the same time improving their home’s comfort level, air quality and carbon footprint. From the lender’s perspective, an appropriately structured loan to support such an upgrade helps their customer save money and become more environmentally responsible, while the risk of default on a loan of this type would be far lower than other consumer or home finance products given that it actually saves the homeowner money.
Say that again, the loan saves the homeowner money? Yes, you heard that correctly. Combine the right home upgrades with an appropriately structured loan and the monthly savings on the homeowner’s energy bills can often exceed the payment on the loan. These savings are used to repay the loan and in no time, the loan is paid and the homeowner continues to enjoy the savings, comfort and environmental benefits that the home upgrades provide.
The ability to offer savings to the homeowner each month with little to no upfront cost is really what positively shifted the market in residential solar installations. Companies like SunRun and SolarCity used innovative solar lease and power purchase agreement financing structures that made it easy for customers to make the switch to renewable energy.
So why hasn’t the market for alternatives to finance these energy efficient home makeovers evolved more? Well, there are quite a few reasons for that. Most notably, there needs to be substantial demand for such a product to motivate lenders to dedicate the resources to provide these solutions. For many years, the perception has been that consumer awareness and demand for these efficiency improvements has been lacking. The good news is this dynamic is changing and lenders are taking notice. Of course, in recent years financial institutions have become more apprehensive about lending in the consumer and home finance sectors of the market. As the economy improves, this obstacle is also diminishing.
Government agencies are trying to do their part to stimulate demand for residential efficiency by providing financing alternatives to support homeowners. The Department of Energy (DoE) and the Federal Housing Authority (FHA) recently announced the FHA PowerSaver Loan pilot program, offering a dedicated financing vehicle for energy saving home upgrades. This program was introduced, in part no doubt, as a replacement to PACE financing initiatives. After being touted by the Obama Administration, principally Vice President Biden and the Middle Class Task Force, PACE was stopped dead in its tracks by the FHA. In short, the FHA was concerned about the “seniority” of the obligations generated under PACE programs, which would have put more payment obligations ahead of the mortgage debt that the FHA holds.
While it lacks some of the benefits of the PACE program, the PowerSaver program is a positive step in providing a more accessible and dedicated financing vehicle for efficiency upgrades. The PowerSaver loans will offer homeowners up to $25,000 to make energy-saving improvements of their choice, including the installation of insulation, duct sealing, replacement of doors and windows, HVAC systems, water heaters, solar panels and geothermal systems. Loans will have terms of 15 or 20 years depending on the type of upgrades and will offer interest rates estimated to be between 5% – 7%, aided by the 90% FHA guarantee on the debt. The FHA announced 18 participating lenders in the program on April 21, 2011 (see list here).
So stay tuned to development in the financing market for energy efficient home upgrades. While it’s still early in the game and the market is still developing, market forces, consumer awareness and political will seem to be aligning to help this market evolve – and make “going green” at home a no-brainer.