The Federal Housing Finance Administration (FHFA) just released new requirements for the 2019 Fannie Mae and Freddie Mac Green Lending Programs. The new requirements may increase the implementation cost of these loans for some borrowers. However, with careful consideration of the type and quantity of energy-saving and water-saving measures implemented, this cost can be minimized.
Partner Energy believes that even with these new requirements, the interest savings offered by Green Loans means they are still a favorable financing choice for most clients.
CURRENT 2018 FHA REQUIREMENTS
The 2018 FHFA requirements state that borrowers must achieve EITHER a 25% reduction in energy consumption OR a 25% reduction in water consumption. Most borrowers met this requirement in the most cost-effective way by implementing only water-saving measures – typically upgrading shower heads, faucets, toilets and at times, improving irrigation systems or landscaping.
NEW 2019 FHA REQUIREMENTS
The 2019 FHFA requirements state that borrowers must achieve an overall 30% reduction in energy AND water consumption with a minimum of 15% this reduction coming from energy consumption. Obviously, this means that both energy-savings measures and water-savings measures will need to be implemented to meet lending requirements. Furthermore, FHFA requires that the borrower engage a third party to help collect and process utility data for use in energy star portfolio manager prior to loan close.
IMPACT TO BORROWERS
The old requirements favored the implementation of water-savings measures alone to meet the 25% consumption reduction requirement. The typical cost of implementation was approximately $300-$500 per unit. A significant amount of that cost usually came from replacing a toilet and the remaining from upgrading shower heads and faucets. Since the new requirements require that at least 15% energy savings is achieved, we anticipate that most borrowers will shift away from toilet replacement ($200-$400 unit) and use those cost-savings to make interior and exterior lighting upgrades (which tend to be the most cost-effective and high-impact energy-saving measure to implement). While lighting upgrades may be slightly more expensive than toilet upgrades, in the $250-$500/unit range, this increase will be mitigated somewhat by the cost savings of not replacing existing toilets. If it is impossible to achieve a 15% energy savings by only upgrading interior and exterior lighting, borrowers will need to consider other energy-savings measures such as replacing appliances, hot-water heaters, or HVAC systems. Since energy and water savings measures do not have to be implemented in every unit, your energy consultant can advise you on the quantity of units that need to be upgraded to meet the minimum requirements.
Partner Energy believes that for most borrowers, FHA Green Loans are still a favorable financing opportunity despite the more stringent requirements now in place. That being said, it is more important than ever that borrowers consult with their energy consultant to determine the most cost-effective ways to meet the new requirements for FHA loans given each property’s condition and upgrade budget.