If you buy or own an energy-efficient house, does this make you less likely to default on your mortgage? Is there a connection between the monthly savings on utility costs and the probability that you’ll pay your loan on time?
A new study by the University of North Carolina suggests that the answer to both questions is a resounding yes. Using a massive sample of 71,000 home loans from across the country that were originated between 2002 and 2012, researchers found that mortgages on homes with Energy Star certifications were on average 32 percent less likely to default compared with loans on homes with no energy-efficiency improvements. Energy Star homes, which can be renovated dwellings or newly built, provide documentable savings of 15 percent or higher on utility bills compared with houses containing minimal energy improvements.
Researchers took pains to statistically separate out factors other than energy-efficiency savings that might account for the strikingly different performances by borrowers on their mortgages. They controlled for house size; age of the house; neighborhood income levels; house values relative to the area median; local unemployment rates; borrowers’ credit scores; loan-to-value ratios; electricity costs; and even local weather conditions.
The sample came from a giant mortgage data repository managed by CoreLogic, a California-based company that has access to millions of loan files and payment records supplied by major banks, lenders and servicers. The average sale price of both the energy-efficient homes and the others was approximately $220,000, removing the possibility that the energy-efficient properties were high-end houses purchased by families who are less likely to default.
So why the big difference in payment performance among borrowers during the roller-coaster decade that saw the mortgage bubble, the housing-price boom, the calamitous bust and the start of a recovery? To Cliff Majersik, executive director of the Institute for Market Transformation, a Washington, D.C., think tank that sponsored the research, there’s no question.
“It stands to reason,” he said, “that energy-efficient homes should have a lower default rate because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments.”
In light of the superior performance of mortgages on certified energy-saving houses, what discounts or preferences can borrowers or owners of such houses expect at the bank when they go in for a loan? After all, a key component of the interest rate you pay on a mortgage is compensation for default risk – that is, the possibility that you’ll go belly up, walk away, end up in foreclosure and produce big losses for the lender or bond investor.
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