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Stylized Text: Home Energy Ratings.

Financing Energy Efficiency: An EEM Handbook

 

Exhibit A -
FREDDIE MAC'S
ENERGY-EFFICIENT MORTGAGE PROGRAM

(for home and second mortgages)

Freddie Mac has specific policies to promote the use and installation of energy-efficient improvements in the properties securing the home and second mortgages it purchases. These policies are detailed in the Sellers' and Servicers' Guide and involve:

  • defining the purchase price or value when retrofitting existing properties with improvements to conserve energy (section 1306)
  • defining what an energy-efficient property is and what items to consider when appraising the energy efficiency of a property (section 2214)
  • allowing a higher housing expense-to-income ratio for mortgages secured by energy-efficient properties (section 2308)
Energy-efficient improvements must be completed before delivering the mortgage to Freddie Mac, with one exception. Energy retrofit items (such as those listed in section 2214) may be completed within 120 days after the delivery date.

(a) Defining purchase price or value when retrofitting existing properties with energy-efficient items. Section 1306, "Energy Conservation and Rehabs," outlines our policies on how to include the value of anticipated energy-efficient items in a property's purchase price or appraised value and how to manage funds for incomplete retrofits. (This section also applies to non energy-related issues such as rehabilitation, renovation, and refurbishing older housing.)

If the energy improvements are to be included in the mortgage amount, the total purchase price is considered the sales price of the property plus the actual cost of the anticipated energy improvements. The loan-to-value (LTV) ratio is still calculated based on the lower of this total purchase price or the appraised value (including the energy items).

To include energy items in mortgage amount,
calculate total purchase price as follows: 
Total
purchase =
price		 Sales
price of +
property 		 Actual cost of
anticipated
energy items 

    total purchase price 
  /  
LTV ratio is based on lessor of   or
  \  
    appraised value
(including energy items) 

If the energy improvements are to be included in the mortgage amount, the estimate of market value for the property must include the energy-efficient items, whether existing or being retrofit to the property. The appraiser must analyze the sales comparables to determine if they have energy-efficient items comparable to the subject property. The energy-efficient items of each comparable sale should be identified. An adjustment must be made to reflect the market-perceived differences between the subject property and each of the comparables.

The appraisal report (Form 70, 72, or 465) must include, in the market estimate, the energy improvements as if completed. If the market area lacks sufficient data to develop an estimated value including the energy improvements, part 2 of Form 70A, Energy Addendum, should be used to value them. The appraiser should insert the value of the energy-efficient items in the subject column of the "sales Comparison Analysis" on Form 70 or "Market Data Analysis" on Form 72 or 465.

The following additional requirements apply to a mortgage secured by a property having an incomplete energy retrofit:

  • The energy improvements must be completed within 120 days of the delivery date.
  • The funds needed to complete the improvements may not exceed 10 percent of mortgage amount. These funds must be placed in an escrow account (in the borrower's name) with disbursements controlled by the Seller or Servicer. The "Date of Note" on Form 11 or 13SF, Mortgage Submission Voucher, must be the date of mortgage funding, not the anticipated final disbursement of escrow funds.
  • An escrow agreement describing the work to be completed must be in the mortgage file. This agreement must provide that if default occurs or if the improvements are not completed within 120 days, the Seller or Servicer must either:
    • close the escrow account and apply the remaining funds to curtail the mortgage if work on the improvements has not begun, or
    • complete the improvements. Upon completion of the energy improvements, the property must be inspected; and the Seller or Servicer must maintain Form 442, Satisfactory Completion Certificate, in the mortgage file.
(b) Defining energy-efficient property and conservation items.

Section 2214, "Energy-Efficient Properties," defines these properties as follows: An energy-efficient property uses cost-effective design, materials, equipment, and site orientation to conserve nonrenewable fuels. Implicit in this definition are proper design and installation of materials and equipment consistent with the climate in the area. (This definition could also include the use of alternative equipment to generate or supplement an individual property's power needs, such as a windmill or solar panel that generates electricity.)

Items normally considered when evaluating the energy efficiency of a home include:

  • insulation with adequate R-values installed in ceilings, exterior walls, and roofs; around hot water heaters; under floors that cover unheated areas; and surrounding ducts and pipes in unconditioned areas
  • caulking and weather stripping
  • double- or triple-pane windows
  • window shading or landscaping for solar control
  • storm fittings
  • automatic setback thermostats
  • heating, cooling, and lighting systems and appliances designed to be energy efficient
  • solar systems for water heating, space heating, and cooling
  • wood-fired heating systems
  • building designs that minimize energy use, such as smaller window areas and earth sheltering
The appraiser should list all the energy-efficient items in the description of improvements and note their contributory value in the "Sales Comparison Analysis" on Form 70 or "Market Data Analysis" on Form 72 or 465.

A rating of "high" energy efficiency is required to justify additional consideration in the credit underwriting process. Energy efficiency ratings may be established by completing on e of the following documents:

  • part 1 of Form 70A (A property should have features from each of the three listed categories (insulation, windows, and doors, heating and cooling) to receive an overall "high" energy efficiency rating.)
  • a report based on an established home energy rating system (HERS) sponsored by a local utility, home builder association, or a state or local government (The HERS report should also show a "high" rating and feature items for the categories of insulation, windows and doors, and heating and cooling.)
(c) Calculating credit ratios. Section 2308, "Monthly Debt Payment-to-Income Ratios," allows higher housing expense-to-income ratios for energy-efficient properties. (See the last paragraph of section 2308.)

In the normal underwriting process, the seller should consider the impact of utility charges have on the borrower's ability to meet the monthly housing expense and properly maintain the property. We allow higher qualifying ratios on energy-efficient properties because generally these properties achieve reductions in utility expenses and allow the homeowner to devote a higher percentage of income to the housing expense. The increase in housing expense should not exceed the total estimated monthly savings of the energy-efficient items shown on part 1 of Form 70A or on the HERS report. If higher ratios are used, the Seller must document in the mortgage file calculation and sources used to justify the ratios.

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