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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.

"Debt 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 "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 house prices.

"There are publicly traded companies that can offer EEMs--whether or not they are doing so is a whole other question," Mr. Wiese told "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 impact."

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.

Energy 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.

"Because we're 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 households."

"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 "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 greater returns."

"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."


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