February 21, 2006
Opening the Umbrella of Socially Responsible Investing to Include Energy Efficient Mortgages
by Bill Baue
Indigo Financial Group promotes energy efficient mortgages, which have long been available through
a Fannie Mae program but have yet to reach their market potential.
Stocks and bonds represent the bulk of socially responsible investing (SRI), but the burgeoning of
socially responsible property investing (SRPI) is expanding the bounds to include things like
energy efficient mortgages (EEMs) under the SRI umbrella. EEMs are designed to reward borrowers
buying new homes constructed with energy-saving designs, materials, and systems, as well as those
renovating existing homes to enhance eco-efficiency. Energy efficient homes lower energy bills and
thereby increase the amount available for monthly mortgage payments.
investments in property in a way that encourages energy conservation would indeed be SRI," said
Gary Pivo, professor of urban planning
and natural resources at the University of
Arizona and a leader of the SRPI movement. "Together with its cousin, the Location Efficient
Mortgage, which gives credit for locating in transit-oriented locations, these instruments are
steps in the right direction."
"What I like about them is that they recognize that
properties differ in their environmental performance or eco-efficiency, and even more importantly,
that these differences can also generate financial savings to the owner," Prof. Pivo told
SocialFunds.com. "In such instances the owner can be evaluated as having higher income and thus
eligible for a larger loan, so long as other parameters, such as their total debt and loan to value
ratios, are not violated."
Fannie Mae (ticker: FNM), a hybrid public-private
institution chartered by Congress to make mortgages available to low- and middle-income Americans
that is publicly traded, introduced
EEMs more than a quarter century ago, but they have yet to fulfill their potential market
reach. The Fannie Mae website features a search function
for lender partners by state.
"EEM is not a widely-practiced method," said Joel Wiese,
assistant manager of Lansing, Michigan-based Indigo Financial Group (IFG), which specializes in EEMs. "Last year and the year
before, I was told that Fannie Mae was doing about $80 million in volume--adding up the total loan
amount of all the homes they are financing through this program--and from my experience I know that
the majority of that is new construction."
While $80 million may sound like a lot, it
translates to only 500 homes across the country at $160,000, well below the national average of
"There are publicly traded companies that can offer EEMs--whether or not
they are doing so is a whole other question," Mr. Wiese told SocialFunds.com. "For example
Countrywide [CFC], the nation's largest
independent loan lender, doesn't offer them right now, but if they were to make energy efficient
mortgages part of an initiative to curb greenhouse gas emissions, they could make a very big
Indigo seeks to fill this market opportunity by promoting EEMs, which entail
getting a Home Energy Rating System (HERS) audit to
determine that the house is 30 percent more energy-efficient than a comparable house built to the
Model Energy Code (MEC). This audit, which
consists of a review of house plans as well as an on-site inspection to test the leakiness of the
home and its ducts, allows the home to earn a US Environmental Protection Agency (EPA) ENERGY STAR label certifying eco-efficiency.
efficient homes compensate for the slightly higher costs through long-term energy (and hence
monetary) savings. For example, an energy efficient home may cost $3,000 more than its $200,000
counterpart that is not energy efficient, slightly raising the loan amount and monthly mortgage
payments, but this increase is more than offset by monthly electric bills, averaging monthly
savings of $68. Estimated monthly savings on an energy efficient home compared to its $250,000
counterpart that is not energy efficient would be $77, according to Indigo.
a smaller company that's trying to be innovative, we're doing more than the big companies, which
are like an oil tanker that takes miles and miles to stop," said Mr. Wiese. "One of Indigo's goals
is to drive EEM as a best practice for promoting energy conservation, reducing our dependence on
fossil fuels like oil, natural gas, and coal, and reducing the overall energy consumption in US
"We had a family heating with a conventional furnace fired by propane, so we
added what's called dual-fuel component, which automatically determines if it is more efficient to
heat with propane or electricity," Mr. Wiese explains. "At colder temperatures, it automatically
switches to propane, which can better accommodate the heating needs of the structure, and when the
temperature is 40 degrees or warmer, the furnace knows to heat with the cheaper fuel, which is
actually electricity right now."
EEMs can also help finance renewable energy for new and
existing homes depending on federal and state policies as well as the availability of "net
metering," which allows utility companies to track and buy back excess power households produce
through wind or solar power.
"This kind of thinking can and should be extended to
commercial property by having appraisers recognize that ecoefficiency can generate savings for
tenants or owners, which in turn should be monetized into higher property values," Prof. Pivo told
SocialFunds.com. "Higher value allows for a larger loan and if the cost of production doesn't
increase, then a developer can build with less equity and thus generate greater leveraging and
"These ideas are being pursued in the UK as part of the Sustainable
Property Appraisal Project and here in the US by Green Building Finance Consortium," he continued.
The Sustainable Property
Appraisal Project was launched in June 2005 by Forum for the Future, a UK-based charity promoting
sustainable development. The Green Building Finance Consortium was born at the December 2005 Green & Energy Star Building Finance Summit sponsored by the Institute for Market
Transformation to Sustainability (MTS). "They could lead to not only more such loans
but perhaps a secondary debt market, such as Green Mortgage Backed Securities."