What Could Possibly Hold Green Financing Back?

By: Jon Dougal
Date: July 2009

Well what is green financing?  I would suggest that it could be mortgages that value energy efficient buildings (homes) higher than traditionally built homes.   Green mortgages already are shown to have lower risks of lending.  Green homeowners appear to have a 40% less default rate on their mortgages than traditional mortgage holders, according to the NAR.  It could be because green homes operate at a lower cost than traditional homes and therefore allow more discretionary income to green home owners.

The major problems in the lending industry are that few lenders understand the concept of a higher value being assigned to energy efficient or high performance homes.  It is a new concept and while logical they don’t have any experience in the rating of properties from that viewpoint.

Let’s start with the appraiser.   He/She comes to the building with a preconceived set of values to assign to a home.   Mostly looking at comps for the area, and then deciding on what might make this home more or less valuable.   Is he looking for a higher SEER HVAC system- probably not?  Is he looking for a comparison of energy bills compared to the comps of the area- no?   What about insulation values for the windows and walls, the intrusions into the building for plumbing, electrical, etc.  Are these intrusions an invitation for pests, air to dilute hot or cold air?   Does he evaluate possible thermal bridging or air quality issues from paints and materials – probably not.  He/she doesn’t see the connection between these issues and the occupant’s ability to make mortgage payments.

Allow me to use the example of added value from the installation of CFL’s – compact florescent light bulbs.  Let’s start with the costs.  An incandescent at $.50 compared to a CFL at $4.00.

The incandescent will burn for 1000 hours compared to 8000 hours for the CFL.  The 100 watts of electricity will produce 10 watts of light compared to 26 watts of electricity and still 10 watts of light for the CFL.   Meanwhile the incandescent will produce 90 watts of heat which adds to the load of the cooling system (in summer), but the CFL only produces 16 watts of heat for the same amount of light given off.   The CFL lasts 8-10 times longer.

Now let’s figure the operational costs for just one CFL against one incandescent bulb over 8 years of operation.  Incandescent – cost $.50/100 watts x 8 years = $64.00, add cooling costs for 8 years =$12.00, + bulb replacement and you have a whopping $80.00 over 8 years.   The CFL at cost of $4.50, plus $16.00 over 8 years of operations, plus no added cost to the cooling load and not bulb replacement you get $20.00 costs of operation over 8 years.   That is $60.00 of added value over 8 years.  Now total up all the lights used in a home over 8 years and you get real savings and more discretionary money for a family to use on paying their mortgage.

If the average appraiser were to do the calculations on just the added value of a CFL to the property the case could be made to the lender that there is more value in a “green home”!