Partners (Summer 1996)

House mosiac A New Approach to Affordable Housing
by Andrea Guay


In developing any home ownership program, public and private organizations alike have realized that there are costs other than principal and interest payments which comprise significant percentages of a family's income.

Traditional home ownership programs, particularly those designed to meet the needs of first-time homebuyers, seek to address the barriers created by front-end mortgage costs. Benefits offered by these mortgage products include the waiver of escrow, the reduction of closing costs and downpayment, or the financing of points. However, in many instances, it is the monthly costs that most directly affect the affordability of home ownership.

Costs such as utility bills can pose serious problems for first time buyers. Some advocacy groups would like to see the requirement of an energy efficient audit similar to some communities' requirements that homes for sale be free of lead paint and radon. Whether or not it is mandated, requiring energy efficiency measures to be installed in new homes and making it easy and affordable to retrofit existing housing is an innovative move toward decreasing the overall cost of housing, particularly for low- and moderate-income families.

Energy Costs and Housing Affordability

Standing alone, energy bills can drive monthly expenses beyond the point of affordability for many. According to a study by Roger Colton of the Boston-based firm Fisher, Sheehan & Colton, Public Finance and General Economics (FSC), more than 2.7 million gas heating households have winter home heating burdens exceeding 10 percent of income, and more than 1.0 million households within 47 states and the District of Columbia with incomes less than $6,000 have winter natural gas home heating burdens exceeding 30 percent of their income. In the summer, in 162 of 185 electric companies studied, utility bills for households using modest amounts of electric consumption (500 kWh per month) exceeded 10 percent of their income. More than 20 electric companies found low-income energy burdens of more than 20 percent, and 88 companies found burdens exceeding 15 percent of income.

Currently, in the realm of community development, financial institutions specialize in mortgage finance, equipment manufacturers specialize in delivering a bottom line profit to their shareholders, and energy consultants and utilities specialize in providing energy audits or conservation techniques. There is, however, room for each to fit into the energy efficient equation.

Bank Financing

... the additional financing will be provided regardless of loan-to-value ratios or debt-to-income ratios.
Fortunately, an energy efficient mortgage (EEM) program does exist. HUD approved mortgage lenders can provide a loan product, insured by the Federal Housing Authority (FHA), that allows a homeowner to finance up to $4,000 above the existing purchase price of the home (adding it to the mortgage) in order to make energy efficient improvements to the property. As long as the savings generated by the energy efficiency measures exceed the additional cost of the energy efficiency upgrades added to the mortgage, the additional financing will be provided regardless of loan-to-value ratios or debt-to-income ratios.

The funds necessary to pay for the actual installation of the energy efficiency measures identified by the audit can be escrowed at the financial institution providing the mortgage. Contractors can be paid from the funds and any unused portion could be used to reduce the principal amount of the mortgage.

EEMs benefit the low-income homebuyer, the financial institution, and the utility company. Energy efficiency improvements increase both the affordability and the comfort of the new home for the homebuyer. Further, pre-existing partnerships serve to help the homebuyer obtain the energy efficiency audit, financing, and installation without significant expenditures of time or resources to arrange such activities on their own. Banks benefit because the reduction of monthly expenses helps to reduce the risk of mortgage defaults. Even in the event of a default, the EEM is insured. The Utility benefits from an increased stability in home ownership among its low-income population, which reduces the chances of utility payment troubles. EEM can help to promote a more even distribution of the community's energy demand throughout the year, and utilities are then able to better manage peak demand. This means lower energy rates for everyone.

Energy Efficient Initiatives

Many examples of partnerships that include cooperation between some combination of developer, manufacturer, lender, utility, and homebuyer exist in the Southeast. All serve to conserve energy and, as a result, provide cost benefits to the parties involved. For example, the Atlanta Gas Light Company and YORK Heating and Air Conditioning are providing area homeowners with an affordable, combination gas heating and cooling unit that will reduce monthly living expenses.

Where homes are retrofitted to reduce energy costs, the benefit of the partnership is two-fold. The utility company provides a rebate to the distributor of the unit (rather than to the homeowner). Thus the retail price of the unit is marked up from a lower base price and the cost of the system to the homeowner is lower. The utility then provides 6 percent interest rate loans to the homeowner to cover the purchase price and installation of the heating/cooling unit. Fueled by natural gas, a low-cost, environmentally-friendly resource, the unit's efficiency is expected to reduce homeowner utility costs by as much as 50% annually.

The 6 percent, 5 year maturity loans for the purchase and installation of the unit can be made for up to $10,000. If the homeowner should sell the property before the loan is repaid, it is expected that the loan will be repaid from the sale proceeds. To date, the gas company has experienced a 72 percent approval rate for all loans, and no defaults.

This program will be available through November, 1996. After that, the utility will seek bank financing in order to continue to offer this energy efficient investment to area residents.

For small businesses, the energy efficient units can have a direct impact on the company's bottom line. The cooling units provide fast payback to small businesses because the utility company can offer a 5 to 7 year leasing program. According to Atlanta Gas Light, experience has shown that the monthly energy savings can be directly linked to positive cash flow for area businesses.

Of course, energy-efficient homes do not only benefit low- and moderate-income families. In Monroe, Georgia, the Monroe Water, Light and Gas Commission recently announced an agreement with Horizon Properties to jointly promote energy efficiency and energy conservation in the development of two upscale residential neighborhoods. The utility will be granting concessions on the installation costs of its utility services, and the developer will be meeting the commission's specifications for efficient heating and cooling of the new homes using a gas heating and cooling system.

While the city will be able to better manage the community's overall energy system demand, this arrangement assures that homeowners will enjoy in-home comfort and a reduction in annual energy bills. The installation cost is included in the cost of the finished home and amortized over the term of the mortgage. J. Keith Caudell, CEO of the National Bank of Walton County states, "While lenders don't technically recognize energy savings in determining available loan amounts for homebuyers, we believe these systems will allow homebuyers to consider larger homes."

Cool Communities

Another interesting partnership with a nonprofit organization is noted with the Homestead Habitat for Humanity office in Florida. Using CDBG funds to purchase 40 acres of ex-agricultural land in south Dade County, the Habitat office has planned and begun construction on a 187-unit, model community project. Jordan Commons, designated as a "Cool Community" by the U.S. Environmental Protection Agency (EPA), is an integrated village including daycare facility, family resource center, athletic facility, and playing fields with an environmentally conscious design.

Landscaping and building features are designed to reduce the heat island effect by 3-5 degrees, and methods for recovery and reuse of construction material will reduce waste. All houses will include ceiling fans, reflective rooftops, and window tints. Each will also be outfitted with the most energy-efficient appliances available. Water heating systems will be powered by solar panels and security lighting will be powered by photo voltaic cells. Systems to recapture gray water and reuse it for subterranean irrigation and aquifer replenishment will be incorporated. And finally, the streets through Jordan Commons will be lined by a canopy of trees to enhance the overall cooling effect.

The combined efforts of Florida International University, the Florida solar Energy Center, the EPA, the U.S. Department of Energy, and American Forests, will produce energy reductions of 38 to 48 percent for the residents, according to Habitat. "Savings of that magnitude will be especially significant for the homeowners whose utility payments are almost as high as their mortgage payments," said Habitat's Director, Joe Ciarmataro.

The evidence to support energy efficiency investments in new and existing homes is compelling, especially in the area of affordable housing. For community development practitioners, it is imperative to look beyond individual housing, and attempt to create livable, workable communities that will help home owners to maintain affordable lifestyles, and small businesses to maintain operations over the long term.


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