Build Back Better Homes

Report

March 2021

How to Unlock America’s Single-Family Green Mortgage Market

Authors

Rita Ballesteros, Consultant

David Heslam, Earth Advantage

Greg Hopkins

Authors listed alphabetically. All authors from RMI unless otherwise noted.

Contacts

Greg Hopkins, ghopkins@rmi.org

Copyrights and Citation

Rita Ballesteros, David Heslam, and Greg Hopkins, Build Back Better Homes: How to Unlock

America’s Single-Family Green Mortgage Market, RMI, 2021,

http://www.rmi.org/insight/build-back-better-homes.

RMI values collaboration and aims to accelerate the energy transition through sharing

knowledge and insights. We therefore allow interested parties to reference, share, and cite our

work through the Creative Commons CC BY-SA 4.0 license. https://creativecommons.org/

licenses/by-sa/4.0/.

All images used are from iStock.com unless otherwise noted.

Acknowledgments

The authors would like to thank Madeline Salzman from the US Department of Energy for

technical feedback and non-policy content review throughout the development of this report.

The authors also thank the following individuals for offering their insights and perspectives

on this work:

Steve Baden, Residential Energy Services Network (RESNET)

Elizabeth Beardsley, U.S. Green Building Council

Alysson Blackwelder, U.S. Green Building Council

Jeremy Bourne, RiskSpan

Jacob Corvidae, RMI

Michelle Foster, Home Innovation

Ken Gear, Leading Builders of America

Jim Gray, Lincoln Institute of Land Policy

Janet Jozwik, RiskSpan

Cliff Majersik, Institute for Market Transformation (IMT)

Ryan Meres, Residential Energy Services Network (RESNET)

Robert Sahadi, Montgomery County Green Bank

Andrew Speake, National Renewable Energy Laboratory (NREL)

Clayton Traylor, Leading Builders of America

Signo Uddenberg, MKThink

Lowell Ungar, American Council for an Energy-Efficient Economy (ACEEE)

This work was generously supported by Energy Foundation and the Ray & Tye

Noorda Foundation.

Authors & Acknowledgments

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2Build Back Better Homes

About Us

About Earth Advantage

Earth Advantage is a 501(c)(3) nonprofit organization based in Portland, Oregon, that

addresses the environmental impacts of residential buildings by developing and promoting

green home standards, conveying green home data to the residential real estate market, and

supplying training to building professionals and a growing energy efficiency workforce.

About RMI

RMI is an independent nonprofit founded in 1982 that transforms global energy systems

through market-driven solutions to align with a 1.5°C future and secure a clean, prosperous,

zero-carbon future for all. We work in the world’s most critical geographies and engage

businesses, policymakers, communities, and NGOs to identify and scale energy system

interventions that will cut greenhouse gas emissions at least 50 percent by 2030. RMI has

offices in Basalt and Boulder, Colorado; New York City; Oakland, California; Washington, D.C.;

and Beijing.

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3Build Back Better Homes

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4Build Back Better Homes

Table of Contents

Executive Summary

Introduction

Background

Green Mortgages as a Scalable, Cross-Cutting Tool

Recommendations to Structure Single-Family Green

Mortgage-Backed Securities (MBS)

Methods to Scale Single-Family Green Mortgages

Opportunities for Federal Policymakers

Conclusion

Appendices

Appendix A: Calculations and Assumptions

Appendix B: Proposed Calibration Framework for Green Mortgages

Appendix C: Existing Green Mortgage Origination Process Map

Appendix D: NREL Home Energy Cost Estimator Methodology

Appendix E: ResStock Representative State-Level Information

Appendix F: Additional Green Mortgage Product/Process Recommendations

Appendix G: Model Language for the GSEs’ 2022–2024 Duty to Serve Plans

Appendix H: Residential Green and Energy-Related Data Sources

Endnotes

Executive

Summary

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6Build Back Better Homes

Executive Summary

The vast majority of America’s housing

stock is in need of improvements—not for

cosmetics, but for performance, health, and

safety. Over the next decade, shifts in utility

models, energy and climate policy, weather events,

and recognition of health and resilience priorities

will greatly expand this need. This is especially true

for low- to moderate-income (LMI) households and

communities of color. And yet, because the upfront

costs for these kinds of improvements largely fall on

homeowners, they are not likely to happen fast enough

without scalable low-cost financing solutions.

Concurrently, there is growing interest and demand

among capital markets investors for environmental,

social, and governance (ESG) investment options and

“green” securities. Financial institutions representing

over $18 trillion globally recently committed to align

their portfolios with the goals of the Paris Agreement,

but they lack sufficient market-ready green

investments to fully make this shift. The mortgage

industry is well positioned to help fill this gap.

Mortgages can become a primary investment vehicle

for deploying billions of dollars to meet this investor

demand while also fulfilling consumer demand for

green home improvements. Although the market

for multifamily green mortgage-backed securities

has grown tremendously (making Fannie Mae the

largest green bond issuer in the world for the fourth

consecutive year in 2020

), the single-family market

has only just begun to emerge as a destination for

green capital.

Innovations in housing data analysis, mortgage

processing and automation, and low-interest financing

products can facilitate this market transformation

through the existing real estate transaction process.

This report proposes practical solutions to reduce

friction in originating and securitizing single-

family green mortgage products already offered by

government-sponsored enterprises Fannie Mae and

Freddie Mac (the “GSEs”) to create a new $2+ trillion

market within a decade. Specifically, this report offers:

•

A framework and qualification criteria for the GSEs

to structure single-family green mortgage-backed

securities. This would allow green mortgages for

retrofitting existing homes and for high-performing

new construction to be converted into a massive

new green bond market.

•

Methods for the GSEs and lenders to scale single-

family green mortgages. These include leveraging

green home data in underwriting and appraisal

processes to enable greater market efficiency

(targeting dedicated additional proceeds to higher-

opportunity homes and borrowers to pay for

improvements) and automating systems to reduce

existing burdens on lenders and appraisers.

•

Opportunities for federal regulators and

policymakers to support these goals, including

by ensuring information transparency to correct

major market failures and by climate-aligning GSE

lending activities.

As the primary engines in US housing finance,

Fannie Mae and Freddie Mac offer the scale and the

mechanisms for market transformation. The GSEs

and other housing finance leaders can capitalize on

favorable market and policy trends and other key

windows of opportunity underway to position this

market for success.

Introduction

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8Build Back Better Homes

The US housing market faces a dynamic set of

interrelated challenges: affordability, equity, health

and safety, and resilience, all in the face of an

increasingly urgent climate crisis. These challenges

disproportionately affect low- to moderate-income

(LMI) households and communities of color. Housing

market actors are not yet effectively directing

resources toward addressing these issues. However,

scaling readily available mortgage products can

help change that by increasing access to green

home improvements. This report recommends

targeted interventions to scale up single-family

green mortgage products offered by Fannie Mae and

Freddie Mac through pathways that protect both

borrowers and lenders.

A robust single-family green mortgage market

can deliver significant benefits and investor-ready

environmental, social, and governance (ESG) impacts.

Fannie Mae and Freddie Mac could generate more

than $2 trillion of new green mortgage-backed

securities (MBS) within a decade by streamlining and

scaling up their existing green mortgage products to

comprise 15% of their annual single-family mortgage

volumes (half the penetration level achieved on the

multifamily side). This would improve nearly 9 million

homes across the country, generate net cost savings

of $12 billion for consumers, create roughly 650,000

domestic jobs, and avoid 57 million metric tons of

carbon emissions (see Appendix A for calculation and

assumption details).

Why Now?

Different market actors have attempted to scale

versions of green or energy-efficient mortgages in

the past, without much success at a national level.

In recent years, however, supply-side motivation and

consumer demand have become better aligned toward

common goals.

Capital markets have been seeing ESG demand from

investors continue to outpace supply, resulting in a

modest premium (or “greenium”) for green and ESG

investments like green bonds.

In the spring of 2020,

Fannie Mae launched its first single-family green MBS, in

part to meet such demand, sending a powerful market

signal. By the end of 2020, Fannie Mae had issued $111

million in these green bonds,

backed only by loans on

ENERGY STAR® Version 3.0 certified new construction

homes. However, this program can go further to include

pathways for millions of existing single-family homes to

benefit from green improvements.

Estimated 10-year impacts of scaling up single-family green mortgagesExhibit 1

Estimated 10-Year Impacts

$2.2 trillion 8.7 million $12 billion 650,000 57 million

Single-family green

mortgage-backed

securities market

Homes improved in

quality, performance, &

resilience nationwide

Net savings to

consumers, after higher

loan payments

Jobs created based on

consumer savings and

investment

Metric tons of

cumulative carbon

emissions avoided

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9Build Back Better Homes

Streamlining mortgage financing for green home

upgrades will also support the efforts of many large

financial institutions (including some of America’s

top mortgage lenders) that have committed to

“climate-align” their portfolios with the goals of

the Paris Agreement through greener lending and

investment activities.

Additionally, there are now sophisticated, credible,

and readily available home energy data systems and

tools that can integrate into increasingly automated

mortgage underwriting and appraisal processes. The

GSEs have a timely opportunity to leverage these

tools and pursue tactical policy updates to streamline

single-family green mortgage adoption. The GSEs can

integrate these objectives into their upcoming Duty

to Serve plans (see Appendix G) and ensure that their

ongoing Uniform Appraisal Dataset (UAD) redesign

captures critical green data fields for all homes to

facilitate market development.

Now is the time to spur green products in the

mortgage market: historically low interest rates are

driving record high refinancing activity and can offer

attractive financing terms for green upgrades that

improve overall home quality and value. Finally, this

opportunity aligns well with key priorities of the new

Biden Administration to address inequities, housing,

and the climate crisis (including stated plans to

weatherize 2 million homes, retrofit 4 million buildings,

and build 1.5 million affordable new homes

), which can

be mutually tackled by unlocking a fair and data-driven

single-family green mortgage market.

Background

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11Build Back Better Homes

Source: US Bureau of Labor Statistics, Consumer Expenditure Survey 2019

Average expenditures as % of net income for the 80 million households earning <$70k/yearExhibit 2

Concurrent Housing Crises

When attempting to fundamentally shift how the

mortgage market works at scale, it is important to

fully understand the current market’s impacts and

ripple effects across the economy. The solutions

posed in this report will not solve every housing crisis

mentioned in this section. Rather, the aim of this

report is to propose solutions that can help and that,

at minimum, do not exacerbate these crises. The goal

of this section is to acknowledge the array of complex

and interrelated housing issues affecting homeowners

and residents today for consideration by the GSEs

and other mortgage industry leaders, as well as

policymakers, regulators, and program designers.

For most households in America, energy costs are

higher than either property taxes or home insurance

(as shown in the graphs below), yet these costs are

not systematically included in mortgage affordability

calculations.

Energy costs amount to significant

financial burdens for many Americans. Barriers to

funding and financing for cost-effective housing

improvements have led to persistent underinvestment

in housing infrastructure, resulting in too many

Americans living in substandard housing that is

expensive to operate. There are more than 98 million

single-family homes in the United States, roughly half

of which were built before building energy codes were

introduced over 40 years ago.

Poor energy performance is really a symptom of

larger housing crises concurrently impacting American

homeowners and renters. Today’s housing affordability

crisis, often concentrated in densely populated urban

areas, is due in large part to a lack of supply.

This

issue is especially pronounced in rental housing, where

in recent decades, the real income of renters has

not risen at the same rate as rental costs.

Although

housing prices have increased over time, asset quality

of existing homes has largely stalled or declined due to

aging features and typical wear and tear.

7.1%

4.8%

4.2%

16%

14%

12%

10%

Energy

Costs

Energy Costs Property Taxes Insurance & Maintenance

Income Band:

Households:

Property

Taxes

<$15k

7M (13%)

$15k–$30k

22M (17%)

$30k–$40k

13M (10%)

$40k–$50k

11M (8%)

$50k–$70k

17M (13%)

Insurance &

Maintenance

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12Build Back Better Homes

This creates situations where both a home’s upfront

costs and maintenance costs rise, compounding the

cost pressure on home buyers and renters.

In addition,

inefficient homes are not only more expensive to

operate, but on average also have worse indoor air

quality that can increase occupants’ healthcare costs.

Without convenient and affordable capital investments,

these properties face higher risks in terms of energy

costs, health threats, and loan performance.

Increasingly frequent extreme weather events

pose additional risks. Older homes with deferred

maintenance may be more susceptible to significant

damage from high winds, heavy rainstorms, smoke

from wildfires, and extreme temperatures during

heat waves and cold snaps. According to the National

Oceanic and Atmospheric Administration (NOAA),

2020 was the sixth consecutive year with ten or more

billion-dollar weather and climate disaster events in

the United States.

In 2020 alone these disasters

caused $95 billion in damage nationwide, almost

doubling the damage in 2019.

As a result, insurance

costs to cover damages have been increasing or

becoming entirely unavailable to some homes.

A recent report commissioned by the Commodity

Futures Trading Commission issued stark warnings

about the impacts of climate change on financial

markets for these same reasons.

Fortunately, the

most exhaustive cost-benefit analysis of natural

hazard mitigation to date found that every $1 invested

in home retrofits to protect against floods and

hurricanes can save $6 (every $1 invested in retrofits

to protect against fires and earthquakes can save $2

and $13 respectively).

These housing risks disproportionately impact

lower-income households and households of color.

Nearly 31 million US households face high energy

burdens (i.e., spend more than 6% of their income

on utility bills, roughly double the national average).

And a staggering 16 million US households face

severe energy burdens (i.e., spend more than 10% of

their income on energy).

Approximately 25 million

households have reported foregoing necessities like

food or medicine to pay their energy bills (7 million of

which face that decision on a monthly basis).

High energy burdens can also lead households to

dangerous situations, such as using ovens for heat or

risking unsafe indoor temperatures. These burdens are

particularly concentrated in communities of color: the

median energy burden for Black households is 43%

higher, and for Hispanic households 20% higher, than

for non-Hispanic White households.

There has been a long history of racist housing and

lending policies and practices (including but not

limited to: New Deal enforced segregation, redlining,

restrictive covenants, biased appraisals, and real

estate agent steering). This has resulted in households

of color disproportionately making up lower-income

households and occupying lower quality housing

in the United States.

Intergenerational wealth is

often generated in families through homeownership

(and the financial security that assets can provide).

Thus, strategies that can upgrade existing housing

and reduce the costs of, while increasing access to,

homeownership can be particularly beneficial for

households that have been precluded from such wealth

accrual opportunities.

It has been found that the median White household has

nearly 20 times more wealth than the median Black

household.

And although 73% of White households

own their home, only 41% of Black households

do.

Additionally, communities of color are more

geographically concentrated in regions where land

prices have been increasing rapidly, contributing

to displacement as property taxes rise. These

communities are also often more exposed to, and

harder hit by, the fallout from natural disasters and

extreme weather, and are more likely to live close to

power plants and high-pollution areas.

This leads to

higher rates of health complications and particularly

asthma, which affects Black children at more than

double the rate of White children (16% versus 7%).

Meanwhile, the backdrop behind all these challenges

is an increasingly urgent climate crisis. The scientific

consensus is clear: to avoid the catastrophic effects of

climate change, we must limit global temperature rise

to 1.5°C, which will require a 50% reduction in global

emissions by 2030 compared with 2010 and net-zero

global emissions by 2050.

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13Build Back Better Homes

Household energy use accounts for roughly 20% of

all US greenhouse gas emissions. However, our homes

represent a critical segment of the economy that is

not decarbonizing at nearly the rate required.

A lack

of information transparency and awareness, market

signals and incentives, and scalable low-cost financing

solutions all contribute to stagnant residential sector

progress on climate and equity issues. Failure to

change this trajectory will mean substantial risk

to both the housing stock and the mortgage and

insurance industries in the years ahead.

Single-Family Market Context

Together, Fannie Mae and Freddie Mac back nearly half

of all single-family mortgage originations, to the tune

of approximately $1 trillion per year.

The GSEs are

federally backed home mortgage companies that buy

single-family and multifamily mortgages originated by

lenders across the country, guarantee their principal

and interest payments, and then repackage and sell

them as mortgage-backed securities (MBS) on the

secondary market. This makes the mortgage market

more liquid, stable, and affordable. To that end, they

also standardize requirements to which lenders and

appraisers nationwide conform.

Between 2009 and 2019, annual mortgage origination

volume averaged $1.8 trillion for one- to four-unit

residential buildings, split roughly equally between

refinance and purchase products.

Yet only a tiny

fraction of this volume prioritized getting families into

homes with low energy costs or improving the housing

stock. In 2018, only 3% of the total mortgage loan

volume was in home improvement financing products,

and limited data suggests only a small portion of these

are dedicated to green home improvements.

Fannie Mae and Freddie Mac both offer green

mortgage products that finance energy (and other

green) improvements, but neither have been

effectively adopted by lenders at scale to allow

widespread access. Furthermore, neither GSE has yet

identified a full framework for green improvement

financing of existing homes to be included in single-

family green MBS; Fannie Mae’s new single-family

green MBS program currently only covers ENERGY

STAR certified new construction homes.

Although the percentages of mortgage loan volume

including home improvement costs so far are

small, the total potential for financing green home

improvements is compelling. To put this market in

context, the total annual budget of the Weatherization

Assistance Program (WAP)—the US government’s

energy improvement assistance program for low-

income families—is $1.1 billion, less than 2% of the

annual volume of home improvement mortgage loans.

Adding in the total annual amount spent on residential

energy efficiency through all utility-funded programs

nationwide, this volume of annual spending is still only

about 6% of the existing home improvement mortgage

loan market size, or only 0.18% of the total annual

mortgage market by volume.

Unlocking even a fraction of the existing single-family

mortgage market to enable streamlined access to low-

interest financing for green improvements will help

millions more residents access the benefits of higher-

performing homes. Given the significant potential for

cost-effective green home upgrades, a substantial

portion of the GSEs’ single-family mortgage issuance

could become green within 10 years.

Today, homeowners are spending money on home

improvements, but typically need to seek out

upgrade packages, financing, and products on

their own. According to Harvard’s Joint Center for

Housing Studies report, Improving America’s Housing

2019, US homeowners spent $68 billion in 2017 on

improvements to roofing, siding, windows, doors,

HVAC systems, and insulation—all projects that could

generate meaningful home energy savings if more

2018 home improvement loans were $60 billion; WAP in FY18 totaled $1.1 billion ($250M from DOE, $453M from LIHEAP, $407M from

nonfederal sources).

Utility energy efficiency program spending on residential programs was slightly under $3 billion in 2018:

https://www.eia.gov/todayinenergy/detail.php?id=42975

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14Build Back Better Homes

efficient options are installed. Such systems and

equipment replacements were the fastest growing

segment of the home improvement market in recent

years (see pie charts below).

Notably, US homeowners used cash from savings to

pay for 77% of home improvement projects, with

the next largest sources being credit cards or retail

store charge cards. This paradigm disproportionately

excludes lower-income households that do not have

the savings or credit to pay for these upgrades.

The report concludes that the share of replacement

projects is likely to remain high in the coming

decade as the housing stock ages, and that offering

homeowners additional financing options (in lieu of

cash savings) would likely lead to significantly stronger

growth in improvement expenditures.

Replacement projects take up a growing share of homeowner improvement budgets Exhibit 3

Notes: Replacements include exterior, systems and equipment, and interior projects. Discretionary projects include kitchen and bath remodels,

room additions, and outside attachments. See Table A-1 in Harvard’s Joint Center for Housing Studies report, Improving America’s Housing 2019,

for more detailed definitions of project categories. Homeowner improvement spending totaled $220 billion in 2007 and $233 billion in 2017.

Source: Improving America’s Housing 2019, Joint Center for Housing Studies of Harvard University.

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15Build Back Better Homes

Most homeowners rely on cash from savings to finance improvementsExhibit 4

In addition to replacements, national surveys show

that consumers want energy efficiency in their homes

but the market is not yet meeting that demand.

In a Demand Institute survey of more than 10,000

households, increased energy efficiency was the

number one housing desire, ranked according to the

size of the “satisfaction gap.” In other words, 71% of

respondents thought energy efficiency is important

but only 35% were satisfied with their current home.

Increased energy efficiency was ranked higher than

updated kitchens and finishes, safe streets, privacy,

and more.

Key findings from the National Association of

REALTORS’ latest annual survey of its members

include that: 70% of agents and brokers reported

that energy efficiency promotion in listings is valuable

and 61% found that consumers are interested

in sustainability. Yet 61% were not confident

connecting clients with green lenders, and the highest

ranked market issue (from a list of 13 issues) is

“understanding lending options for energy upgrades

or solar installations.”

Notes: Credit Card category includes retail store charge cards. Home Equity includes cash from refinancing, home equity loans, and home

equity lines of credit. Other includes contractor-arranged financing and all other funding sources, including those not reported.

Source: Improving America’s Housing 2019, Joint Center for Housing Studies of Harvard University.

Green Mortgages as

a Scalable, Cross-

Cutting Tool

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17Build Back Better Homes

These trends point to a compelling opportunity for

green mortgages to overtake a substantial market

share in the years ahead, if the delivery process

can be sufficiently streamlined and scaled. A viable

solution requires the right mortgage products and

the right processes to make delivering those products

easy, targeted, and scalable. The right products

are largely in place now, but process improvements

are still needed so that these products can become

standard offerings to borrowers. The following

sections of this report discuss how to better activate

the market for deployment.

Fannie Mae’s HomeStyle® Energy mortgage and

Freddie Mac’s GreenCHOICE® mortgage allow

borrowers to use mortgage proceeds to finance the

cost of green single-family home improvements

when purchasing or refinancing a home, up to 15%

of its “as-completed” value. Eligible improvements

within their “green” scope include energy efficiency

measures (e.g., air sealing, insulation, high-efficiency

windows and HVAC equipment), water efficiency

measures (e.g., low-flow fixtures), renewable energy

(e.g., solar panels), and also resilience improvements

(e.g., hazardous brush and tree removal in fire zones,

storm surge barriers and retaining walls, foundation

retrofitting for earthquakes).

They also permit homeowners to finance certain pre-

existing debt related to green improvements (e.g.,

from residential PACE,

iii

utility efficiency programs,

consumer loans), rolling those pre-spent dollars into the

new mortgage. This takeout mechanism can enable the

GSEs to play a role in providing liquidity for other green

home financing providers in the marketplace. This can

free up more capital for those actors to redeploy within

their programs while affording borrowers the lower

interest rates of a mortgage product.

These types of green home improvements are not

a comprehensive solution for all the housing crises

described above. However, when well-implemented,

they can meaningfully improve affordability and health

and safety outcomes for borrowing households, while

also reducing loan performance risk and climate risk

at scale. Given the housing and energy burdens that

iii

Property-assessed clean energy, a loan product financed through the property’s tax assessment.

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18Build Back Better Homes

LMI households and households of color often face,

these groups can benefit significantly from well-

designed and consumer-protected financing products.

At current historically low interest rates, mortgage

products offer what may be the most affordable

financing available for such projects. When offered

through standard real estate transaction and refinance

processes, these mortgage products can scale to

impact millions of homes each year.

Appendix A includes an example of project-level

financial benefits for households that finance energy-

and/or water-saving green home improvements

through green mortgages at a basic level (15%

savings) and deeper level (25% savings). In practice

these figures will vary depending on the measures

and technologies installed. A household could

realize average annual net savings (i.e., utility cost

savings offset by slightly higher mortgage payments,

assuming the full project size is added to the mortgage

balance) of $314 after a basic retrofit and $326 after a

deeper retrofit based on the assumptions in Appendix

A. The GSEs and/or lenders can set up automated

checks to confirm that expected net savings are

estimated to be positive for borrowers upfront to

better protect consumers. Note that these examples

do not take into account other potential value streams,

such as reduced health and safety costs or increased

home value.

Green homes offer more than just utility cost

savings. Residents also benefit from improved

comfort and indoor air quality, increased resilience

to environmental disasters, and reduced carbon

emissions.

Green homes also have the potential

to experience reduced loan default rates: one study

covering a time period that included the Great

Recession found 32% lower default rates for energy-

efficient homes than non-energy-efficient homes.

Freddie Mac’s own analysis found that RESNET’s

Home Energy Rating System (HERS) rated homes sold

for 2.7% more than comparable unrated homes, and

that better-rated homes sold for 3%–5% more than

lesser-rated homes. Additionally, the study showed

that loans with high debt-to-income ratios (45% or

above) with ratings appear to have lower delinquency

rates than unrated homes.

A separate meta-analysis

of dozens of valuation studies found a 4.3% value

premium for certified green homes.

Given that

appraisal standards do not yet explicitly account for

home performance, this premium is likely based on

perception and may be understated.

Recommendations

to Structure Single-

Family Green

Mortgage-Backed

Securities (MBS)

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20Build Back Better Homes

The ability to pool and securitize a sufficient volume of

eligible mortgages that can be sold in the secondary

market as green MBS is key to keeping capital flowing

to finance green homes and improvements. This value

chain can generate mutually reinforcing benefits

for the GSEs, lenders, and borrowers. Studies have

found that capital markets investors pay a premium

for green bonds, particularly for those that are

government issued and investment grade, and that

follow defined governance and reporting procedures.

For example, an average “greenium” up to 9 basis

points has been observed on the secondary market.

The additional cash flow stream from such premiums

can benefit market participants in different ways,

depending on the type of securitization. In the case of

lender swap transactions (the most common type), this

can be a significant incentive for lenders and, in turn,

can enable lenders to offer discounted interest rates

to borrowers of green mortgages, bolstering demand.

In the case of portfolio securitization transactions, this

can be a significant incentive for the GSEs themselves,

which could be partially passed on to the benefit of

lenders and/or borrowers of green mortgages.

The GSEs’ single-family green MBS business can take

lessons learned from their successful multifamily

counterparts, which began issuing green MBS in 2012

and grew substantially—likely in part thanks to the

use of incentives. Although it took five years for the

multifamily market to achieve multibillion dollar scale,

existing performance standards and access to data

in the single-family market means there does not

need to be such a long period for a robust and viable

single-family green MBS market. Although single-

family loan sizes are inherently smaller and more

fragmented with more participants, adding complexity

to the securitization process relative to the multifamily

business, this can also offer advantages for investors

in terms of risk diversification across MBS pools.

As mentioned above, the securitization of single-

family green MBS started in 2020 with Fannie Mae’s

new program. At time of writing, that program only

uses one method to identify properties for inclusion:

the EPA’s ENERGY STAR Certified Homes program

for new construction. Expanding the single-family

green MBS market to include homes that are already

green, as well as homes that can access financing to

become green, is necessary for equitable distribution

of benefits and achieving scale. This report proposes a

framework and qualification criteria to that end.

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21Build Back Better Homes

Multifamily Green MBS Context

Fannie Mae offered its first multifamily green

mortgage loans in 2011 and issued its first

multifamily green MBS in 2012. These were initially

based on multifamily new construction projects.

In 2014, Fannie Mae and the EPA announced the

ENERGY STAR Score for multifamily buildings,

creating a consistent method to measure

performance of existing multifamily buildings.

In 2018, Fannie Mae established a Green Bond

Framework. By the end of 2020, Fannie Mae had

issued over $85 billion in multifamily green bonds,

making it the world’s largest green bond issuer

for four straight years.

On average over those

four years, Fannie Mae’s multifamily green MBS

represented over 30% of its total multifamily

mortgage volume.

Although Freddie Mac started

this effort after Fannie Mae, its multifamily green

business has also been growing. It has purchased

$63 billion in multifamily green mortgages since

2016 and issued over $3 billion in multifamily green

MBS since 2019. In the multifamily market, the

large majority of green MBS volume has been for

green improvements to existing buildings, primarily

through Fannie Mae’s Green Rewards program.

Fannie Mae’s cumulative green MBS issuanceExhibit 5

Source: Fannie Mae Capital Markets, “Multifamily Green MBS," 2021; excludes retired Fannie Mae green programs.

$90,000M

$80,000M

$70,000M

$60,000M

$50,000M

$40,000M

$30,000M

$20,000M

$10,000M

Single-Family (ENERGY STAR Certified

Construction)

Multifamily Green Building Certification Multifamily Green Rewards

2012 2013 2014 2015 2016 2017 2018 2019 2020

$72B

$13B

$111M

www.rmi.org

22Build Back Better Homes

Methods to Scale Single-Family

Green MBS

Given the needs of much of the single-family

housing stock, there is a significantly larger market

opportunity for single-family green mortgages. Single-

family green MBS achieving market penetration of

15% of total GSE single-family mortgage volumes (half

the level achieved by Fannie Mae’s multifamily green

business) would equate to over $150 billion per year

as shown in Appendix A, with most of that financing

existing homes.

The single-family green MBS market can expand

into both new and existing homes simultaneously by

continuing to identify and securitize more new green

homes, and by developing a framework to identify

and categorize green improvements for existing

homes. The discussion below provides a summary of

this proposal, which follows the logic of Fannie Mae’s

Multifamily Green Bond Framework. Further details

can be found in Appendix B, along with a discussion

of the importance of leveraging rating systems in

addition to certification programs.

Single-family green mortgages can be categorized for

three types of homes: new construction that meets

varying levels of above-code criteria, comprehensively

retrofitted existing homes, and existing homes

that have had basic (yet impactful) upgrades. We

propose a framework to establish these qualifications

for evaluation into green MBS with five tiers of

related performance and impact (details on specific

certifications, ratings, and other criteria are included

in Appendix B).

Existing homes that undergo improvements should

achieve a rating or certification with appropriate

designation based on the level of savings or impact.

This framework can be used to give green designations

to homes with mortgages that finance energy- or

water-saving improvements with independent third-

Methods to measure required achievement for single-family green mortgage tiersExhibit 6

Qualifying Home

Types

Towards Zero Group 1:

High

Performance +

Ventilation

Group 2:

High Efficiency

Group 3:

Base

Certifications/

Ratings

Group 4

Basic

Retrofits

High-Performance

New Construction

Homes

Via Certification Via Certification Via Certification

or Rating*

Via Certification

or Rating*

N/A

Comprehensive

Retrofits and/or

Solar

Via Certification Via Certification Via Certification

or Rating*

Via Certification

or Rating*

N/A

Basic Retrofits

and/or Solar

N/A N/A Via Rating Via Rating Via Rating

* Note on certifications versus ratings: green home certifications such as LEED, ENERGY STAR, and Passive House establish that a home

has achieved a target level of high performance and/or met other criteria. Home energy ratings such as HERS and Home Energy Score can

assess any home’s assets (equipment, envelope, etc.) and model energy consumption, assigning a score and recommending cost-effective

improvements that save energy and money. At a practical level, ratings can be more easily leveraged to gauge retrofit impacts while more

comprehensive certifications will typically apply to higher tiers.

www.rmi.org

23Build Back Better Homes

party verified or modeled savings of at least 15% on

a whole-home basis, measured against the home’s

current performance. This 15% savings threshold is

based on the GSEs’ multifamily green criteria and

aligns with existing Duty to Serve criteria for single-

family green mortgages.

In cases where the green mortgage allows for basic

improvements without an energy report (currently

up to $6,500 for Freddie Mac or $3,500 for Fannie

Mae—which we recommend increasing to at least

$5,000), those basic improvements should be chosen

from prequalified lists of cost-effective measures

that have been determined to reliably deliver cost-

effective savings. Such eligible measure lists can be

curated, short, easily verifiable (as better than existing

conditions), and reevaluated annually based on

studies of a sampling of homes to verify that expected

savings are being realized. For reference, the DOE’s

Weatherization Assistance Program achieves average

energy cost savings of 13% with basic measure

packages that cost on average $4,695 per home.

The expansion of multifamily green MBS to handle

existing buildings required the development of a rating

system for existing multifamily buildings. In the single-

family market there are already two energy rating

systems in use nationally: HERS® and Home Energy

Score™. These programs deliver energy reports (each

with a score or rating of the home’s current condition)

that can be used to qualify improvements financed

by the GSEs’ green mortgage products. The scores

produced from these two rating systems can also be

used on their own to categorize loans into the lower

tiers of the proposed single-family green mortgage

designation framework.

As part of the final certification of completion

process, the GSEs could require that lenders have

qualified third parties inspect each completed

project and provide a final rating. This step will

ensure the work is verified by an energy professional,

protecting consumers and mitigating the risk of

fraud. Additionally, a “test out” score can be used

to determine relative performance and inform green

MBS disclosures and tracking. The large and growing

number of trained green raters nationwide can supply

updated score reports through established business

models. A benefit of requiring a rating after work is

completed is that some homes may qualify for higher

green tiers, which could offer lower interest rates for

those borrowers. Another benefit is that the rating will

generate a verified energy cost estimate, which can

facilitate an automated valuation adjustment of the

property based on its relative energy performance.

A critical component of updated processes is to

capture green mortgage loan designations in loan

delivery data. The GSEs use the Uniform Loan Delivery

Dataset (ULDD),

an aligned format for lenders to

communicate details about each mortgage loan sold.

The ULDD informs the key characteristics needed by

the GSEs in order to pool and securitize loans into

MBS. Several green home databases now exist that

document third-party home certifications and ratings

(see Appendix H for more detail). The automated

integration of such data can enable lenders and the

GSEs to identify both qualifying green properties

that are already in their portfolios and new green

properties as loans are acquired.

The GSEs’ next update of the ULDD should include the

necessary data fields for green mortgage loans. In

the interim, an industry working group can be formed

to recommend how existing green home data sources

(including those recommended in this report) can be

leveraged for this purpose.

Methods to

Scale Single-

Family Green

Mortgages

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25Build Back Better Homes

Before the single-family green MBS market can

reach its potential, single-family green mortgage

processes must be improved. Adoption of the GSEs’

existing single-family green mortgage products

remains extremely low to date because of a lack of

awareness and demand from consumers and specific

operational pain points that add complexity, time,

and cost for lenders.

The GSEs provide favorable terms for lenders, giving

a $500 credit per loan for green mortgage origination

and allowing lenders to close and deliver these

loans without recourse before the improvements

are completed. There is no rate premium for green

mortgages, and they can be bundled with other GSE

products (e.g., low down payment mortgages) that

further improve affordability and access to capital.

But along with these perks come additional process

steps and considerations that have made them more

challenging than conventional mortgage originations.

For reference, Appendix C includes a high-level

diagram illustrating the single-family green mortgage

origination workflow based on existing GSE guidelines

for lenders.

Single-family green mortgage products will inevitably

involve some level of additional process steps

compared with a standard mortgage. However, these

need not be obstacles because innovations in housing

data analysis and automation can be leveraged.

Below are the top three operational pain points that

can be addressed in the immediate term (additional

recommendations can be found in Appendix F):

Lack of awareness/demand and inability to

effectively sell green mortgage products

Burdensome project evaluations for lenders

Limited market of green appraisers and lack of

comps for as-completed valuations

Data and automated solutions available today, in

combination with updates to GSE policies and lender

guidelines, can help overcome these process barriers

to scale up adoption. Below are brief descriptions of

these significant but surmountable lender process

pain points, followed by recommendations for the

GSEs, FHFA, and market-leading lenders to consider

as part of broader efforts to unlock the single-family

green mortgage market:

Lack of awareness/demand and inability to

effectively sell green mortgage products:

Home energy information has been largely

invisible to most homeowners and residents,

except for a handful of jurisdictions in the United

States with residential energy disclosure policies.

Without access to this information, lenders

have been unable to account for energy costs in

mortgage underwriting and appraisal standards,

leaving them no way to identify borrowers and

homes that can meaningfully benefit from green

home improvements through green mortgages.

Because of these information barriers, both

lenders and borrowers miss opportunities to

pursue green mortgage products.

Leverage home energy cost data to increase

visibility of home performance and drive

demand: Data exists today—high-quality,

nationally standardized data from trusted

sources such as the US Department of Energy

(DOE)—that can be leveraged to auto-populate

home energy cost estimates and other

performance metrics into the underwriting

process. This data can enable lenders to initiate

conversations about green mortgage products

with borrowers and more effectively target

homes that may be costly to operate. Adding

a data field for “home energy cost estimate”

(ECE) through the GSEs’ ongoing Uniform

Appraisal Dataset (UAD) redesign initiative

www.rmi.org

26Build Back Better Homes

can effectively capture this information for all

homes nationwide.

Existing tools and databases can allow lenders

to capture ECEs from home ratings (e.g., HERS

or Home Energy Score) and green certifications

when they are available, or capture a baseline

ECE for the majority of homes with no third-

party rating. This same data field can be

leveraged in two use cases: by lenders to better

target and sell green mortgage products,

and by automated valuation models (AVMs)

and appraisers as a baseline for calculating

appraised value adjustments.

The DOE’s National Renewable Energy

Laboratory (NREL) recently developed a Home

Energy Cost Estimator tool to generate home-

specific energy cost estimates for this context

and use case, presenting an automated solution

aligned with the use of automated underwriting

systems and AVMs. This tool is built on

ResStock™, NREL’s comprehensive database

of national housing stock characteristics that

leverages advanced energy modeling and high-

performance computing.

The data is post-processed via six common

appraisal fields: home size, age, location,

utilities, cooling type, and foundation type.

This tool could be integrated with the GSEs’

automated underwriting software (Fannie Mae’s

Desktop Underwriter® and Freddie Mac’s Loan

Product Advisor®) as an additional third-party

vendor, similar to how credit scores are imported

from external sources. This would introduce

a key data point that can jumpstart the green

mortgage origination process. For more detail on

the NREL tool and its methodology, please see

Appendix D.

Burdensome project evaluations for lenders:

Currently, lenders must verify the eligibility

and cost-effectiveness of itemized energy

technologies for green mortgage products

(including to receive credit under Duty to

Serve). However, lenders lack the expertise in

energy technologies and building science to

conduct this work confidently. Due to a lack of

underwriting system integration, this typically

also involves manual calculations outside of

largely automated loan origination processes,

adding complexity, time, cost, and confusion to

the process for lenders.

Leverage eligible measure lists to simplify and

streamline project evaluations for lenders:

State- or region-specific eligible measure lists for

cost-effective measures can be used to streamline

eligibility and cost-effectiveness determinations

for lenders. This concept is permitted by FHFA’s

Duty to Serve regulation,

but it is not being

used in practice.

At minimum, the GSEs’ seller

guidelines should be updated to permit the use of

such lists. ResStock has data that could be used to

create lists for this purpose,

and further analysis

could allow for prequalified eligible measure lists

at a state or regional level for use by lenders.

Additional resources like state- and utility-led

residential efficiency programs can be leveraged

to establish regionalized eligible measure

lists for upgrades that will most reliably

deliver energy and cost savings to homes,

with added potential to align with state policy

goals. These lists can be curated and updated

annually based on independent verifications

of a sampling of homes to ensure that savings

estimates maintain accuracy over time. For

a representation of ResStock’s state-level

information, see Appendix E.

www.rmi.org

27Build Back Better Homes

Limited market of green appraisers and lack of

comps for as-completed valuations:

The GSEs’ current green mortgage products

require appraisers to determine the home’s as-

completed value (i.e., after the improvements

are made) for every project before the financing

has been approved. This adds time and cost

to the process and presents a challenge for

appraisers to attest to market reaction to green

features that have not yet been installed. Today,

only a small subset of appraisers are trained to

perform green appraisals, and these appraisers

do not have access to widespread comps for

green features. Again, the green mortgage

market is stymied because standard processes

do not capture the necessary data.

Leverage automation to simplify and streamline

as-completed valuations:

The GSEs can mitigate the as-completed appraisal

challenge by recognizing the value added by

efficiency improvements using automated

methods based on the income valuation approach.

Automating this step in the process, for example

via the GSEs’ automated appraisal tools, will

remove a significant barrier to help jumpstart the

market for green mortgages. With available data

like home energy cost estimates and the use of

prequalified measure lists for basic improvements

as described above, the opportunity exists to

change the system of valuation into one of

evaluation (i.e., AVM-based value adjustments

confirmed by human appraisers) rather than full

manual appraisals in all cases.

This approach also helps protect consumers by

requiring the energy savings to be higher than

the cost of improvements, thus creating positive

cash flow for the borrower. If no efficiency-

related improvements are made, then there

is no attribution of value, mitigating the risk

of devaluing homes and/or limiting access to

credit. Basic improvements should only require

automated evaluations, which can open up the

market to borrowers that need smaller—but still

valuable—energy upgrades. More comprehensive

retrofits will still benefit from the analysis that

comes with full as-completed appraisals.

Additional recommendations to address other

operational challenges are detailed in Appendix

F. Given the needs of the US housing market, we

also recommend expanding the scope of the GSEs’

single-family green mortgage program to include the

following activities:

•

Expand eligible measures to further improve

health and safety outcomes: The pandemic

has shined new light on the importance of

healthy indoor air quality. There are increasingly

understood and well-documented risks to

respiratory health from combustion-based

appliances in homes, which release toxic pollutants

that can increase indoor air pollution to levels

that would be illegal outdoors.

Related health

risks exacerbated by poor housing infrastructure

are also gaining attention from policymakers and

consumers. These health risks disproportionately

affect lower-income households, and especially

children. Therefore, green mortgage products

should also be able to finance home electrification

upgrades and other health improvements.

Replacing combustion-based appliances and

equipment with cost-effective, clean electric

alternatives (e.g., heat pumps, heat pump water

heaters, induction stoves) can not only improve

health, it can also save money. And it is a critical

part of meeting climate targets—decarbonizing

the economy requires solutions for the 70 million

homes and buildings that burn fossil fuels on-site.

•

Develop plans to increase access, affordability,

and consumer protection for communities of

color: The mortgage industry has an opportunity

to improve racial equity and ensure communities

of color can access the benefits of higher-

performance homes through green mortgages.

These products can be used to help correct some

of the racial inequities historically driven by the

mortgage industry, such as disparate housing

quality and energy burdens.

For example, the GSEs can develop plans and

partner with lenders and community organizations

to more effectively deliver green mortgages in

the highest energy-burdened zip codes of the

www.rmi.org

28Build Back Better Homes

United States. These mortages can finance green

improvements for low-performance homes that

have lacked access to capital in the past. This could

be integrated into efforts to support first-time

homeownership in these communities, including

by educating consumers about green mortgage

products in combination with other GSE affordable

lending products and down payment assistance.

As use of AVMs continues to grow in the mortgage

industry, the GSEs should also take steps to assess

impacts in majority-Black neighborhoods. New

research has shown that AVMs can produce larger

errors in these neighborhoods that may reinforce

the impacts of past racial discrimination.

FHFA and the GSEs should work with counseling

agencies, community organizations, industry

experts, and other stakeholders to develop

actionable plans designed to meet the needs of

these underserved communities.

These solutions can be tested by the GSEs, market-

leading lenders, and other partners through pilot

projects to track and quantify the impacts. Pilot

projects and ambitious green mortgage targets can be

incorporated into the GSEs’ next Duty to Serve plans

for the period 2022–2024, as proposed in Appendix

G, and/or developed outside of Duty to Serve. Better

designed processes through automated and data-

driven solutions means these efforts can scale with

only limited training and education needs for lenders

and appraisers.

Various consumer protection measures are key to

delivering benefits to both borrowers and lenders.

Consumer protection measures include activities

like automated checks to confirm positive net

savings expectations for borrowers, curated cost-

effective eligible measure lists, qualified contractor

networks, post-completion independent third-party

verification ratings, and quality control systems

that include follow-up evaluations for a sampling of

completed projects to verify savings. The GSEs can

work with industry experts, consumer advocates,

and other key stakeholder groups to ensure that

consumer protections are sufficiently incorporated

into efforts to scale up this market. Ultimately, the

GSEs must ensure that financed home performance

improvements actually translate into increased

asset value for homeowners. This work can redirect

consumer spending away from utility bills and toward

their own home’s value.

Opportunities

for Federal

Policymakers

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30Build Back Better Homes

The federal government can also take action to better

align housing finance with its economic, equity, and

climate goals, including by scaling up the single-family

green mortgage market. There are many reasons

to take on this effort: to improve the US housing

stock, correct market failures, protect consumers,

address inequities, and create durable green home

retrofit jobs at scale. Since the New Deal, the federal

government has used the credit system to shape the

housing market. Policymakers enabled the expansion

of the suburbs starting in the 1930s, in part using

mortgage subsidies through the GSEs and the tax

code. The federal government has new opportunities

today to start building back a better housing market

through finance.

In support of the new Biden Administration’s broader

agenda focused on economic recovery, racial justice,

housing, health, and climate (which includes stated

plans to weatherize 2 million homes, retrofit 4 million

buildings, and build 1.5 million affordable new homes

the federal government can pursue the following:

•

Enable home performance labeling and disclosure

nationwide: Residents have a right to know about

the energy benefits or burdens of a home based

on its inherent physical assets before they move

in. Home energy labels highlight key information

about expected energy costs and cost-effective

improvement recommendations. Nationally

standardized ratings based on professional on-

site assessments—such as RESNET’s HERS for

new construction or DOE’s Home Energy Score for

existing homes—can be disclosed to prospective

buyers and occupants at time of listing and time

of rental.

The federal government can prioritize mandatory

home energy labeling nationwide and provide

resources and technical support for local

government implementation. This would enable

consumers to have better information when

budgeting and making housing choices, which can

especially help lower-income households identify

and avoid less tenable living situations.

Strengthening the link between these labels

and financing also enables borrowers to more

easily finance energy and other green home

improvements as part of their mortgages. Some

local governments have already established these

policies.

These can provide a model for scaling

access to energy labels nationally, which would also

drive up demand for green mortgage products to

complement supply-side efforts by the GSEs and

lenders. The costs of professional home energy

ratings could also be subsidized by the federal

government for LMI households.

•

Incorporate green home data fields into GSE

underwriting and appraisal standards: With or

without a national home performance disclosure

policy, FHFA can call on the GSEs to incorporate

key home energy and other green data fields

for all homes nationwide (not just for those with

certifications and ratings). This will help lay the

foundation for greater market efficiency. This would

be possible by, for example, adding a data field

for home-specific energy cost estimates into the

Uniform Appraisal Dataset (UAD) redesign initiative

(underway through 2021). The UAD could be auto-

populated for all homes by tools like NREL’s Home

Energy Cost Estimator, including homes that do not

have third-party ratings or certifications.

This tool is described in greater detail in Appendix

D. This one metric could then be used by lenders

to identify good candidates for green mortgages

and by appraisers and AVMs as a baseline for value

adjustments for home efficiency. This would also

allow for the collection of data over time that can

be aggregated and analyzed to better measure the

benefits of green homes for lenders, borrowers, and

capital markets investors.

•

Measure, disclose, and reduce GSE portfolio

emissions and climate risk exposure: Many of the

world’s largest banks and financial institutions

have committed to climate-align their portfolios

(i.e., bring lending and investment activities

into alignment with 1.5°C-consistent emission

pathways).

Similarly, the federal government

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31Build Back Better Homes

through FHFA can call on the GSEs to start

measuring and disclosing carbon emissions

estimates for their portfolios, establish reduction

targets in line with federal climate goals, and

develop programs to reduce those emissions

accordingly. Existing DOE and market-available

tools can be leveraged to accelerate this

measurement process.

In addition, FHFA can work with other federal

agencies (e.g., NOAA, FEMA) to invest in or start

developing asset-level data that would enable the

GSEs to assess and disclose their portfolios’ climate

risk exposure to increasing floods, wildfires, winds,

sea-level rise, and other sources.

Scaling single-

family green mortgages can be a key tool for both

mitigation and adaptation.

•

Position mortgages to become a primary vehicle

for financing home performance and resilience

upgrades: FHFA could push the GSEs to provide

stronger incentives for lenders to market and

include their single-family green mortgage products

as built-in, opt-out options in all new and refinance

mortgage transactions. The resulting market size

and impacts could double or triple earlier estimates

as many more consumers could be reached with

information about cost-effective upgrades. This

would also drive broader market adoption as non-

agency and government mortgage lenders would

likely follow suit in offering similar product designs.

At a minimum, this mechanism could offer the

basic improvement financing by utilizing AVM-

based evaluations instead of full as-completed

appraisals to streamline origination for lenders.

The GSEs can help build out the green home

improvement market in this way, with the

labor need met quickly (as was the experience

in Portland and Austin with rating disclosure

ordinances). This would help meet the needs of

most US homes to make upgrades while also

aligning with the climate and ESG goals of major

lending institutions and capital markets investors.

• Although not the focus of this report,

the Departments of Housing and Urban

Development, Agriculture, and Veterans Affairs

already require newly built homes with FHA

loans and other federally assisted mortgages to

meet building energy codes (roughly a quarter

of mortgages for new homes). However, the

criteria are mostly still at 2009 code levels and

should be updated to 2021 code levels, which

would cut energy use of these buildings by at

least a third.

These agencies should adopt the

2021 code and the GSEs can be required to do

the same, ensuring that even more new homes

are built to high performance standards.

Conclusion

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33Build Back Better Homes

Borrower Story #1:

A young couple was looking to buy a newly built

townhome as their first home, but they were unsure

that would be possible. When they found a new

townhome certified to the DOE Zero Energy Ready

Home standard, they were pleasantly surprised

to see how low the utility bills were estimated to

be on the real estate listing. They were even more

surprised when their loan officer told them the

energy savings compared to a standard new home

could be considered funds available to be spent

on their mortgage payments. Additionally, the

high performance certification on this home would

qualify them for a discounted interest rate.

The energy cost and interest savings amounted to

$100 per month—enough to allow them to afford

the home. Their mortgage was bundled as part of a

top-tier green MBS pool, enabling their lender and

Fannie Mae to claim ESG credit for the transaction.

What could this market look like in practice when fully up and running? Below are three

hypothetical stories of borrowers benefiting from a robust green mortgage and MBS market:

Borrower Story #2:

To get ready for a comfortable retirement, an older

couple living in a rural area added insulation to

their 1950s home and replaced their furnace with

a high-efficiency heat pump (both paid for with

cash savings). Through a local utility program they

received a Home Energy Score (HES) report that

rated their home an 8 out of 10.

After her husband died a few years later, the widow

decided to move closer to family and listed her

home for sale. When the eventual buyer informed

their loan officer of the home, the loan origination

software confirmed this home was a high performer

that would qualify as Group 3 green mortgage. The

buyer received preferential mortgage terms and

paid a slightly higher price for the home, allowing

the widow to more than recoup her investment in

the upgrades because the appraised value took into

account the high HES.

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34Build Back Better Homes

Unlocking the single-family green mortgage and MBS

market is not only possible today—given advances in

data and automation as well as favorable financial

market and policy trends—it is also necessary. Five

years from now, conversations between friends and

neighbors about green home improvements financed by

mortgages and recognized in the transaction process

can become mainstream all over the country. Time is

of the essence to advance readily deployable solutions

capable of addressing the dynamic, intersectional

crises facing the housing market. Done correctly,

single-family green mortgage products can shift capital

and resources at scale to make living situations more

affordable, healthy, equitable, and resilient—better

serving American households and especially those who

stand to benefit disproportionately.

Scaling access to low-cost green improvement financing

is also in the mortgage industry’s best interests: it

offers an enormous new market opportunity catering

to both consumer and investor demand, while also

helping to future-proof the mortgage business itself

by mitigating ever-increasing climate risk. Mortgages,

through their inherent role in financing America’s

housing, can soon become a primary vehicle for

deploying billions of dollars toward these goals each

year. This report highlights targeted interventions

toward this end, but is also intended to serve as a

starting point in this continuously evolving space. A

coalition of home performance experts and other key

partners already collaborating with ambitious state and

local governments stands ready to support Fannie Mae,

Freddie Mac, FHFA, and other mortgage market leaders

in this important and timely pursuit.

Borrower Story #3:

A middle-income family was buying a move-up

house that needed some work. They were not first-

time home buyers so they felt they understood the

mortgage process. But they were pleased when the

loan officer saw that this home might have higher

utility bills and asked if they were interested in

financing green or energy-related improvements.

By this point they knew the house they were buying

had an old, inefficient water heater, was missing

crawlspace insulation, and had almost no insulation

in the attic. They were able to take advantage of

the basic eligible measures offered through Freddie

Mac to finance a new heat pump water heater and

new insulation. And they worked with a contractor

to have both projects installed within six months

after closing. They felt better knowing they had

created a more comfortable living environment for

their children.

Appendices

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36Build Back Better Homes

Appendix A

Calculations and Assumptions

10-year impact estimatesExhibit A1

Certified New

Construction

High-

Performance

Deeper

Retrofits

Avg 25%

Savings

Basic

Retrofits

Avg 15%

Savings

Avg Loan

Amount

10-Yr Avg GSE Volume

Avg Project Cost

$12,500 $5,000 $250,000 $1,069,000,000,000

Growth

5% 10% 10%

Year

# New

Homes

Existing

Homes

Existing

Homes

Total

Homes

Mortgage

Volume

Project

Financing

Green Mortgage

Volume

% of

GSE Volume

70,000 90,000 450,000 610,000 $152,500,000,000 $3,375,000,000 $155,875,000,000 14.6%

73,500 99,000 495,000 667,500 $166,875,000,000 $3,712,500,000 $170,587,500,000 16.0%

77,175 108,900 544,500 730,575 $182,643,750,000 $4,083,750,000 $186,727,500,000 17.5%

81,034 119,790 598,950 799,774 $199,943,437,500 $4,492,125,000 $204,435,562,500 19.1%

85,085 131,769 658,845 875,699 $218,924,859,375 $4,941,337,500 $223,866,196,875 20.9%

89,340 144,946 724,730 959,015 $239,753,777,344 $5,435,471,250 $245,189,248,594 22.9%

93,807 159,440 724,730 977,977 $244,494,171,211 $5,616,653,625 $250,110,824,836 23.4%

98,497 175,385 724,730 998,611 $249,652,767,146 $5,815,954,238 $255,468,721,384 23.9%

103,422 192,923 724,730 1,021,074 $255,268,593,491 $6,035,184,911 $261,303,778,403 24.4%

108,593 212,215 724,730 1,045,538 $261,384,441,827 $6,276,338,652 $267,660,780,479 25.0%

Total

880,452 1,434,368 6,370,943 8,685,763 $2,171,440,797,895 $49,784,315,176 $2,221,225,113,071

Notes: Market size assumes year 1 green mortgages comprising 450,000 basic retrofits or 5% of all ~9 million annual single-family mortgage

loans, 90,000 deeper retrofits conservatively assumed at 1% of all loans, and 70,000 green new construction homes per proposed framework.

Combined this is just under 15% of GSE volume (half the level achieved by Fannie Mae’s multifamily green business), reaching 25% by year 10.

Basic and deeper retrofits are assumed to grow 10% per year (for basic, leveling off after year 5) and new construction at 5%. Other project-

level assumptions are detailed below. Cumulative impacts are based on weighted average savings (weighted by market share) for existing

home retrofits.

www.rmi.org

37Build Back Better Homes

Weighted Average

Savings

Weighted Average Net

Cost Savings

Weighted Average

Household CO

Savings

16.7% $316 1.45 metric tons

Year Retrofitted Homes Cumulative Net Savings

Cumulative CO

Avoided

(Metric Tons)

540,000 $1,706,400,000 7,803,000

594,000 $1,689,336,000 7,724,970

653,400 $1,651,795,200 7,553,304

718,740 $1,589,852,880 7,207,055

790,614 $1,499,004,144 6,854,623

869,675 $1,374,087,132 6,283,405

884,170 $1,117,590,867 5,110,503

900,114 $853,308,109 3,901,994

917,652 $579,956,376 2,652,016

936,945 $296,074,554 1,353,885

Total

7,805,311 $12,357,405,262

56,507,755

Jobs Created

jobs per $ million of consumer savings

jobs per $ million of investment

$12,357

million of consumer savings

$49,784

million of investment

98,859

jobs from savings

547,627

jobs from investment

646,487

total jobs created

Sources: Household carbon footprint based on US

EPA data (8.67 metric tons per home x 16.67%

weighted average savings) https://www.epa.gov/

energy/greenhouse-gases-equivalencies-calculator-

calculations-and-references; job creation estimates

based on Assessing National Employment Impacts

of Investment in Residential and Commercial Sector

Energy Efficiency: Review and Example Analysis, Pacific

Northwest National Laboratory, 2014, https://www.

pnnl.gov/main/publications/external/technical_

reports/PNNL-23402.pdf.

www.rmi.org

38Build Back Better Homes

Example project-level financial benefitsExhibit A2

NET SAVINGS Basic Retrofit Deeper Retrofit

Estimated Project Cost

$5,000 $12,500

National Average Home Utility Costs/Year

$2,646 $2,646

Average Project Savings

15% 25%

Average Utility Cost Savings

$397 $662

Present Value of 30-Year Savings*

$16,536 $27, 559

Estimated GSE Conventional Mortgage Amount

$250,000 $250,000

Estimated Interest Rate

2.5% 2.5%

Average Mortgage Payments/Year

$11,854 $11,854

Average Green Mortgage Amount

$255,000 $262,500

Green Mortgage Payments/Year

$12,091 $12,446

Incremental Green Mortgage Payment/Year

$237 $593

Sum of Incremental Payments (30 Years)

$7,112 $17,780

Average Annual Household Net Savings*

$314 $326

Notes: Examples for illustrative purposes only and results will vary depending on measures installed. Green mortgage balance assumes

loan-to-value ratio enables 100% of project costs to be financed. Example does not account for incremental income tax benefits from higher

interest payments, or other potential value streams such as reduced household health and safety costs or increased home value. (A meta-

analysis of several studies found a 4.3% value premium for certified green homes,

which is likely based on perception given that appraisal

standards do not yet explicitly account for home performance and thus may be understated.)

Average utility costs include energy and water. The assumed average loan size of $250,000 is based on actual 2019 average single-family

loan size of $246,222 for Freddie Mac and $259,897 for Fannie Mae. The assumed $5,000 basic retrofit project size is based on Freddie Mac

and proposed Fannie Mae thresholds, and the $12,500 deeper retrofit project size is based on 5% of average loan amount; 15% and 25%

savings are assumed based on field experience relative to these project costs. The assumed 2.5% interest rate is based on current market

rates for 30-year fixed mortgages. The analysis assumes 2.0% annual energy price escalation based on actual 1981–2011 average retail

electricity price increase.

Sources: Bureau of Labor Statistics, Consumer Expenditure Survey 2019; US Energy Information Administration Electricity Data Browser

https://www.eia.gov/electricity/data/browser/; Fannie Mae 2019 10-K (page 77) https://www.fanniemae.com/sites/g/files/koqyhd191/files/

migrated-files/resources/file/ir/pdf/quarterly-annual-results/2019/q42019.pdf; Freddie Mac Single-Family Origination Summary https://

clarity.freddiemac.com/historical/origination/origination-summary; www.bankrate.com accessed 2/14/2021.

*Assumes 2% annual energy price escalation; net savings remain the same regardless of original mortgage size

www.rmi.org

39Build Back Better Homes

Appendix B

Proposed Calibration Framework for Green Mortgages

This appendix proposes a framework and methods

similar to those used by the GSEs in Form 4250,

which groups and details various green building

certifications approved by the GSEs to qualify as a

green mortgage loan for green MBS. Below are group

definitions from Fannie Mae’s Multifamily Green Bond

Framework for reference.

The multifamily framework only references

certifications, but our suggested groupings for single-

family include the use of qualifying ratings from either

RESNET’s Home Energy Rating System (HERS) or

DOE’s Home Energy Score system. The use of both

ratings aligns with the policy guidance developed by

the National Association of State Energy Officials in

the EMPRESS project, which aimed to harmonize the

usage of these two scoring systems. In our proposed

format these ratings could align with either Group

2 or Group 3, as defined below, but they would not

qualify a home for either of the top groups because

they do not have ventilation requirements. With a few

edits (in italics) this single-family framework would

align with the multifamily framework.

“Towards Zero” Group: This group recognizes

buildings aiming for net-zero energy (NZE) or water

use, or energy use reductions at NZE-ready levels.

An NZE-ready building is one that is sufficiently

energy efficient such that if solar photovoltaic (PV)

were added, it could operate at NZE.

Group 1: High Performance + Ventilation

Requirements: Group 1 is for green building

certifications that require projected energy

savings of at least 20% relative to federal model

codes, plus ventilation requirements for new

construction projects. Proper ventilation is a

particularly important consideration in energy-

efficient buildings that typically have tight

building envelopes and, thus, more limited outdoor

air exchange.

Group 2: High-Efficiency Buildings: These

certifications must require projected energy

savings of more than 15% relative to federal

model codes. This group does not necessarily have

ventilation requirements.

Group 3: Base Green Building Certifications:

Group 3 certifications must require projected

energy savings of 10% or more relative to the

national baseline or a score improvement akin to

at least a 25% reduction in energy use. This group

does not necessarily have ventilation requirements.

These same group definitions can largely apply to

designate single-family green mortgages (as adjusted

below), and in addition we recommend one more

grouping for the single-family market context:

Group 4: Basic Retrofits: These would encompass

all green mortgages that financed basic

improvements deemed to deliver at least 15%

savings without the need for an energy report.

The GSEs’ underwriting requirements cap these

amounts at small levels. We propose providing

green designation status for mortgages that

include at most $5,000 for this use (assuming

Fannie Mae increases its current $3,500 threshold;

Freddie Mac’s threshold is currently $6,500).

In addition to the four tiers borrowed from Fannie

Mae’s Multifamily Green MBS Framework, we propose

adding this fifth tier (Group 4: Basic Retrofits) for

projects using the green mortgage criteria for basic

improvements. These projects will have completed

improvements selected from prequalified eligible

measure lists (see page 26) that are deemed to

deliver at least 15% whole-home savings. These

projects represent a lighter shade of green, but it

is still critical to include them in the single-family

framework for their capacity to scale loan volumes

and realize the benefits of ample green data for more

accurate valuation while also supporting borrowers

www.rmi.org

40Build Back Better Homes

with thinner margins for loan amounts. Including

basic retrofits in Group 4 creates the opportunity

for nearly any home or borrower to qualify and

participate in this market. This includes opportunities

for serving borrowers and homes with a few “low

hanging fruit” projects for improvements.

The size of single-family loans is much smaller than

those for multifamily buildings, and single-family

homeowners will not have the same capacities as

multifamily landlords for ongoing measurement,

verification, and reporting. In recognition of this, we

recommend incorporating score improvements (i.e.,

point changes) into the framework, which translate

into estimated energy savings. The proposed score

improvement levels required to qualify for Group

3 translate to more than 25% savings and will be

much simpler to track for all parties involved. This

would also mean homeowners would not be required

to submit utility bills annually, as is required for

multifamily buildings. There have been studies of

both HERS and Home Energy Score that show they

work well on average to estimate annual energy

usage.

The GSEs can leverage these asset rating

tools to estimate streams of energy savings. Score

improvements can be measured using HERS or Home

Energy Score as follows:

•

Any home with a HERS rating above 100 must

reduce the HERS score by 35 points to qualify.

•

Any home with a Home Energy Score of 1, 2, or 3

must increase the score by 4 points (i.e., to at least

5, 6, or 7, respectively) to qualify.

Placement in the following framework is our

best estimate and subject to further analysis

and refinement:

Table of qualifying certifications and rating values for single-family homesExhibit B1

TOWARDS ZERO CERTIFICATIONS

ORGANIZATION CERTIFICATION VERSION LEVEL

International

Living Future

Institute

Living Building Challenge 2, 3, 3.1, 4 Certified Living

Zero Carbon Certification 1 Certified Zero Carbon

Zero Carbon Certification Not Applicable Zero Energy Certified

Passive House

Institute (PHI)

Certified Passive House 2016 Classic, Plus, Premium

EnerPHIT Certified Retrofit 2016 Classic, Plus, Premium

Passive House

Institute US

(PHIUS)

PHIUS+ Certified

2015 PHIUS+ 2015, PHIUS+ Source Zero

2018

PHIUS+ Core, PHIUS+ 2018, PHIUS+

Source Zero

USGBC

LEED Zero LEED Zero Zero Energy, Zero Water

Home Innovation

National Green Building Standard

(NGBS) Green

2020 NGBS Emerald + Zero Energy

www.rmi.org

41Build Back Better Homes

GROUP 1 CERTIFICATIONS

ORGANIZATION CERTIFICATION VERSION LEVEL

Build It Green

GreenPoint Rated

1.9–2.1 Certified, Silver, Gold, Platinum

6 Certified, Silver, Gold, Platinum

7 Certified, Silver, Gold, Platinum

8 Certified, Silver, Gold, Platinum

US Dept. of Energy

Zero Energy Ready Home Certified

US Environmental

Protection Agency

ENERGY STAR Certified Homes

Certified3.1

3.2

Earth Advantage

Earth Advantage Home Certification Earth Advantage Zero Energy Ready

USGBC

LEED BD+C: Homes

3 Certified, Silver, Gold, Platinum

4 Certified, Silver, Gold, Platinum

GROUP 2 CERTIFICATIONS/RATINGS

ORGANIZATION CERTIFICATION VERSION LEVEL

Build It Green

GreenPoint Rated Existing Home

Whole Home

2.1 Certified, Silver, Gold, Platinum

Built Green

Built Green 4-star, 5-star, Emerald

Earth Advantage

Earth Advantage Home Certification Silver, Gold, Platinum

Southface

EarthCraft

2012 Certified, Silver, Gold, Platinum

2014 Certified, Silver, Gold, Platinum

1 Certified, Silver, Gold, Platinum

2 Certified, Silver, Gold, Platinum

Home Innovation

Research Lab

NGBS Green Home Certification

2015 Bronze, Silver, Gold, Emerald

2020 Bronze, Silver, Gold, Emerald

US Dept. of Energy

Home Energy Score 10

RESNET

HERS Rating 55 or less

www.rmi.org

42Build Back Better Homes

GROUP 3 CERTIFICATIONS/RATINGS (Delivering 25% Whole-Home Energy Savings)

ORGANIZATION CERTIFICATION VERSION LEVEL

Home Innovation

Research Lab

NGBS Green Home Remodeling

Certification

2012, 2015 Bronze, Silver, Gold, Emerald

US Dept. of Energy

Home Energy Score

8–9

or 4-point improvement

RESNET

HERS Rating

56–65

or 35-point improvement

GROUP 4 BASIC RETROFITS (Delivering 15% Whole-Home Energy Savings)

ORGANIZATION CERTIFICATION VERSION LEVEL

Fannie Mae

HomeStyle Energy without energy

report

Installation of prequalified

improvements with a minimum 15%

deemed savings (aligns with at least

$5,000 spent; requires Fannie Mae to

increase from current limit of $3,500)

Freddie Mac

GreenCHOICE without energy

report

Installation of prequalified

improvements with a minimum 15%

deemed savings (aligns with at least

$5,000 spent)

www.rmi.org

43Build Back Better Homes

Appendix C

Existing Green Mortgage Origination Process Map

Existing green mortgage origination process map based on the GSEs’ selling guides

Exhibit C1

www.rmi.org

44Build Back Better Homes

Appendix D

NREL Home Energy Cost Estimator Methodology

This appendix summarizes a draft unpublished

methodology white paper by the National Renewable

Energy Laboratory (NREL) for calculating energy cost

estimates (ECEs) of single-family detached homes

based on a handful of attributes commonly found in

residential appraisals. The objective of this tool is to

demonstrate accurate cost estimations for single-

family detached homes using readily available inputs

that, in turn, can be leveraged for a range of potential

use cases in the market, including standard home

appraisal processes.

Because a home’s overall energy performance is the

product of many complex (and often hidden) home

energy features and characteristics, stakeholders

across the residential industry who stand to benefit

from this information have long been challenged in

factoring it into decision-making. As a result, DOE and

NREL set out to develop a tool capable of generating

conservative energy cost estimates for single-family

homes in the United States, based on nationally

standardized data. These conservative ECEs are

intended to mitigate risk for both borrowers and

lenders by enabling more complete homeownership

costs to be considered, and serve as a baseline upon

which energy costs of upgraded homes can

be compared.

The following diagram shows the general steps in

determining a home ECE (note that Form 1004 is the

GSEs’ Uniform Residential Appraisal Report):

Workflow diagram for estimating annual home energy costs Exhibit D1

Notes: ResStock is used for energy modeling and the Home Energy Cost Estimator represents post-processing of the data.

Weather Data

Building

Input Data

Energy Use

Lookup Table

Local Utility

Rates

Energy Cost

Estimate

($/year)

User Inputs

(Form 1004)

ResStock™

Energy Cost

Estimator

www.rmi.org

45Build Back Better Homes

To select inputs for building models, the tool

considers responses on typical appraisal forms that

are most relevant to a home’s energy loads. The

table below shows the six common appraisal fields

chosen to inform the energy cost estimator, alongside

the corresponding ResStock parameters, and the

number of possible options for each parameter. These

inputs are chosen because they closely impact the

energy demand of a home and can be pulled from

the appraisal form, while limiting the computational

resources needed for larger sets of inputs. To ensure

that each combination of these options is represented

with a unique building model, NREL evenly distributes

the frequency of each option in the ResStock sampling

routine and generates 362,880 models.

Appraisal form inputs mapped to ResStock parameters and the number of ResStock

options for each

Exhibit D2

Form 1004 Input ResStock Parameter # of Options Option Values

Zip Code

Weather File Location 216 Atlanta, Denver, etc.

Age

Vintage 7 <1950s–2000s

Floor Area

Floor Area 4 1,000–4,000 ft

Cooling

Cooling Type 3 Central, Room, None

Utilities

Heating Fuel 5 Natural Gas, Electric, etc.

Foundation

Foundation Type 4 Slab, heated basement, etc.

www.rmi.org

46Build Back Better Homes

The ResStock sampling routine decides the likeliness

of selecting options using a unique distribution

within each parameter, often dependent on other

parameters such as location, home size, or vintage.

However, to maintain consistency among the ECE

building models, and prevent outlying options

from skewing results, NREL fixes distributions of

options for the remaining parameters based on their

categorization. The remaining inputs not relayed from

the Uniform Residential Appraisal Report (Form 1004)

are categorized and assigned in three ways:

1. Energy-related parameters, such as HVAC

systems or insulation R-values, are fixed at the

20th percentile of efficiency for a given set of

dependencies. The 20th percentile is determined

by sorting options from least to most efficient and

provides a conservative estimate of energy demand.

2. Design parameters, such as garage size or number of

stories, have a less direct impact on energy demand,

and cannot be sorted by efficiency. These are fixed

at the most common option for each parameter.

3. Operational parameters, such as hot water draw

schedules, are set to a single schedule.

Upon fixing input options for the building models,

ResStock utilizes high-performance computing to

simulate models and generate annual energy use

data for the unique combinations of appraisal form

inputs. This energy data includes electricity, natural

gas, propane, and fuel oil loads, and is the basis for

determining final cost estimates. The methodology

for ECEs involves post-processing steps to expand

the potential input options and translate energy data

to consumer costs. The figure below shows example

inputs and their outputs:

Example inputs and outputs of the ECE lookup toolExhibit D3

area = 1025

zipcode = 97035

vintage = 1990

heating = 'Natural Gas'

cooling = 'Central'

foundation = 'Crawl'

Energy Cost Estimate: $1,350/yr

Total Electricity: 28.4 mbtu/yr

Total Natural Gas: 41.5 mbtu/yr

Total Propane: 0.0 mbtu/yr

Total Fuel Oil: 0.0 mbtu/yr

Total Energy: 69.9 mbtu/yr

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47Build Back Better Homes

To test and analyze ECE data, NREL retrieved a

sampling of homes from the Home Energy Score

database and calculated what the energy estimates

would be using the ECE tool for those houses. In

this way NREL could use the HES data as a “truth

standard” for comparison. The figures below compare

the cost data. In general, the ECE estimates costs to

be higher than the HES, because all energy-related

parameters are assumed to be the 20th percentile in

efficiency. This results in a majority of ECE costs being

0%–30% higher than HES, underscoring the tool’s

conservatism. Additionally, ECE costs have a direct

correlation with HES costs. Data points that diverge

from this correlation have ECE parameters that do not

align with the HES because 1) they are not available

in the appraisal form, and 2) the assumptions used in

ResStock do not match that home.

Distribution of percent differences between the ECE and HESExhibit D4

Notes: (ECE Cost – HES Cost) / (HES Cost); positive percent differences indicate the ECE overpredicts compared to HES, while

negative percent differences indicate an underprediction.

20%

18%

16%

14%

12%

10%

% of Homes

Energy Cost Percent Difference

Difference = ECE - HES

% Homes < 0 16.45%

% Homes >= 0 83.55%

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120%

0.4%

2.4%

4.5%

9.9%

15.9%

18.7%

17.1%

13.2%

8.4%

4.6%

2.3%

1.2%

0.7%

0.4% 0.3% 0.2%

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48Build Back Better Homes

Scatter plot of yearly energy costs as calculated by HES and by the ECEExhibit D5

Notes: The fit line, y=1.2x, is the expected relationship given the assumption of lower efficiency in the ECE. The R

and RMSE values

are calculated from this line.

www.rmi.org

49Build Back Better Homes

Appendix E

ResStock Representative State-Level Information

ResStock’s State Fact Sheets provide a summary of

the cost-effective residential savings potential and

top priority energy efficiency improvements in that

state. This same data can be customized, simplified,

and reconfigured to serve the needs of lenders and

loan officers in their interactions with borrowers.

ResStock accounts for the vast diversity in age,

size, construction practices, installed equipment,

appliances, and resident behavior of the single-family

and multifamily residential housing stock nationally,

in addition to the diverse range of climates. As an

example, Pennsylvania’s top 10 improvements are

shown below.

Pennsylvania top 10 improvements Exhibit E1

Source: ResStock State Fact Sheets https://resstock.nrel.gov/factsheets/

www.rmi.org

50Build Back Better Homes

Appendix F

Additional Green Mortgage Product/Process Recommendations

Below are additional recommendations for the

GSEs from a home performance perspective. These

recommendations are intended to improve their single-

family green mortgage products and/or processes to

streamline adoption and scale impact:

•

Adjust guidelines for allowances for small projects:

Energy reports are currently not required by the

GSEs for basic energy and water efficiency upgrades

with costs below $3,500 for Fannie Mae or $6,500

for Freddie Mac. We recommend that Fannie Mae

increase its threshold to at least $5,000, and ideally

higher to align with Freddie Mac’s and reduce market

confusion. Currently as-completed appraisals are

required for all improvements, regardless of size,

including for smaller measures like programmable

thermostats. Green mortgages could be streamlined

significantly if basic improvements below these

thresholds only require evaluations (i.e., automated

AVM-based value adjustments confirmed manually

by appraisers). As-completed appraisals would

remain necessary for larger retrofit projects above

these thresholds.

•

Extend timeline for previous energy reports:

Per GSE seller guidelines, a property may use an

energy report that is less than 120 days old for

green mortgage financing. Extending this window

to at least two years will limit barriers to borrowers

seeking financing for single-family properties. On

the multifamily side, green building certifications

dated within five years are recognized.

•

Improve data integration and facilitate systems

updates: Fannie Mae requires that lenders’ loan

origination systems (LOS) be able to submit certain

energy data fields to Desktop Underwriter, Fannie

Mae’s automated underwriting system. Most

lenders have not made system updates for these

fields. Both GSEs require lenders to submit Uniform

Loan Delivery Dataset (ULDD) data upon loan

delivery. Lender systems must be able to populate

these fields specific to green mortgages and

many have not yet been updated to do so, adding

complication that limits adoption. The GSEs can

work with the industry to determine if incentives or

other mechanisms can spur LOS updates to better

streamline data transfers. At the same time, the

GSEs should ensure that their Uniform Appraisal

Dataset redesign initiative incorporates a few

critical foundational data fields (e.g., home energy

cost estimate for all homes) to support these goals.

•

Expand underwriting: Through data-driven

analyses, the GSEs can evaluate the impact of

utility expenses on borrowers and incorporate this

information into standard underwriting practices.

This would allow GSEs to beneficially account

for reduced housing costs through green home

improvement measures. Both Fannie Mae and

Freddie Mac already have guidance in place to

allow for higher expense ratios when improvements

meet a certain efficiency threshold, but only for

manually underwritten loans. By conducting pilots

with access to much more information about home

energy costs, expanded criteria can be considered

and built into automated underwriting.

•

Expand Duty to Serve credit: We recommend that,

after the 2022–2024 plan cycle, FHFA reopen the

DTS rulemaking. When the regulation is revised,

we recommend amending Section 1282.34(d)(3)

of the regulation to include any and all types of

upgrades financed by green mortgages (including

increasingly important resilience improvements)

as qualifying for Duty to Serve credit. This would

align with the GSEs’ existing green mortgage

requirements and would ease FHFA’s added

qualifying and reporting requirements. This

approach is reasonable given the multiple benefits

green improvements can provide to LMI households

and the reduced risks for the GSEs.

www.rmi.org

51Build Back Better Homes

Appendix G

Model Language for the GSEs’ 2022–2024 Duty to Serve Plans

Duty to Serve Overview

Under the Housing and Economic Recovery Act of

2008, the “Duty to Serve” provisions established

by their regulator, the Federal Housing Finance

Agency (FHFA), require Fannie Mae and Freddie Mac

to facilitate a secondary market for mortgages on

housing for very low-, low-, and moderate-income (LMI)

families in three underserved markets: manufactured

housing, affordable housing preservation, and rural

housing. To fulfill this mandate, the FHFA’s Duty

to Serve Regulation, published in December 2016,

requires each GSE to adopt three-year Underserved

Markets Plans with specific activities. The Affordable

Housing Preservation market includes activities

related to purchasing energy and water efficiency

improvement loans on multifamily and single-family

properties with Fannie Mae or Freddie Mac first

mortgage liens. Both GSEs can incorporate this

report’s recommendations into their new plans due

to FHFA in May 2021 for the 2022–2024 period. More

information can be found on FHFA’s website.

Model Language for 2022–2024

Plans

The following proposed objectives and

actions illustrate how the GSEs can take the

recommendations in this report and build them into

their upcoming Duty to Serve plans. These high-

level actions will need further details, narrative, and

impact discussion in the submission of the plans in

order to meet FHFA’s requirements.

Proposed objectives and actions for 2022–2024Exhibit G1

Objective: Increase annual purchases of green mortgage loans from less than 200 in number to 5% of all

loans for low- and moderate-income families by 2024.

Proposed Actions for 2022–2024

Year 1—Loan Product

•

To enable borrower and lender identification of green home improvement potential and to address burdensome project evaluations for

lenders:

•

Evaluate tools like NREL’s Home Energy Cost Estimator that can auto-generate a home’s energy cost estimate (ECE).

•

Develop and execute a pilot to assess one or more tools’ impact on consumer decision-making in pursuing green mortgage products.

•

Develop a plan to allow lenders to use prequalified eligible measure lists in order to streamline cost-effectiveness and eligibility

determinations.

•

Initiate discussions with the Uniform Appraisal Dataset (UAD) redesign initiative project team to share evaluation findings and

consider necessary UAD data fields to support this objective.

Year 2—Loan Product

•

Based on findings in year 1, finalize the terms and publish guidance on how to incorporate such information into the appraisal

standards and underwriting process to identify green mortgage candidates.

•

Collaborate with UAD redesign project managers to ensure key new data fields are added for home ECEs and other green home data in

alignment with Duty to Serve and broader GSE goals.

•

Establish a lender outreach plan to promote use of new tool(s) and prequalified eligible measure lists so they can increase their ability

to effectively market green mortgage products.

Year 3—Loan Purchase

•

Purchase a number of green mortgage loans representing 5% of all loans for low- and moderate-income families.

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52Build Back Better Homes

Objective: Increase the percentage of Duty to Serve eligible green mortgage loans for basic retrofits

(saving >15%) purchased annually that are underwritten with automated valuation models from zero to

50% by 2024.

Proposed Actions for 2022–2024

Year 1—Loan Product

•

Evaluate how to recognize the value added by basic green improvements below stated energy report size thresholds using automated

methods, in collaboration with home performance experts.

•

Develop a methodology for fulfilling the completion certification without the use of a full as-completed appraisal.

•

Identify third parties (e.g., qualified HERS or Home Energy Score raters) who can inspect, verify, and document green improvements

after completion.

•

Develop a plan to pass findings from the inspection to automated valuation models (AVMs).

Year 2—Loan Product

•

Work with industry stakeholders to ensure project completion data is integrated and accessible to AVMs and to lenders via a

green database.

•

Develop and publish guidelines for when automated valuation is permitted, a full as-completed appraisal is required, and a combination

of automation and verification is acceptable.

•

Work with key stakeholders in the appraisal industry to develop training and educational materials for appraisers and evaluators about

changes to the valuation approach for this purpose.

Year 3—Loan Purchase

•

Purchase a number of green mortgage loans underwritten with AVMs that represent 50% of Duty to Serve eligible green

mortgage loans.

Objective: In 5 of the top 10 energy-burdened areas of the United States, annually purchase a number of

green mortgage loans that represent 10% of all loans for low- and moderate-income families by 2024.

Proposed Actions for 2022–2024

Year 1—Outreach

•

Identify five underserved communities with disproportionate concentrations of low-performing homes that make it more expensive to

maintain safe and comfortable conditions (e.g., leveraging ACEEE energy burden data).

•

Develop a plan to test new approaches to reach populations in these areas that are currently not well-served by access to comfortable,

safe, and healthy green housing.

•

Execute a pilot in at least two of these markets to more effectively offer the benefits of green mortgages.

Year 2—Outreach

•

Develop and execute an incentive program for first-time home buyers, in collaboration with community programs and partnerships, to

combine down payment assistance and affordable lending products with green mortgage financing in the five selected areas.

Year 3—Loan Purchase

•

In the five selected energy-burdened areas, purchase a number of green mortgage loans representing 10% of all loans for low- and

moderate-income families.

www.rmi.org

53Build Back Better Homes

Objective: Increase liquidity for green improvements and meet investor demand for green MBS

by issuing 5% of all single-family MBS backed by green mortgages that finance existing home

improvements by 2024.

Proposed Actions for 2022–2024

Year 1—Loan Product

•

Outline a calibration framework with tiers based on levels of energy efficiency for planned green improvements to existing homes (in

addition to new construction):

•

Engage investors of ESG securities and reporting organizations to understand demand, drivers, and required disclosures for green

bond securities and to allow them to review the framework.

•

Assess how required disclosure data on proposed and completed improvements will be consolidated from third parties and green

databases.

•

Assess the feasibility to identify improvements financed outside the mortgage process that can be used to categorize a home’s

green tier within the framework.

•

Develop and execute a pilot that evaluates expected savings on planned improvements with actual savings on completed

improvements.

•

Outline required changes to the ULDD and impacted systems to support required disclosures for the framework; engage industry

stakeholders to begin the update process.

Year 2—Loan Product

•

Update MBS disclosure documents to incorporate the calibration framework.

•

Continue to lead efforts to update the ULDD; develop a plan to support internal and external impacted systems.

Year 3—Loan Purchase

•

Issue a number of single-family MBS backed by green mortgages that finance existing home improvements that represents 5% of all

single-family MBS and that includes a proportionate number of mortgages for low- and moderate-income homeowners.

www.rmi.org

54Build Back Better Homes

Appendix H

Residential Green and Energy-Related Data Sources

Multiple databases and related data services have

been developed by nonprofits and government entities

to provide access to records of energy performance

for homes. Four example products that could act as

beneficial resources as discussed in this report include:

•

RESNET National Registry

•

HELIX from Northeast Energy Efficiency

Partnerships

•

Green Building Registry from Earth Advantage

•

ResStock Analysis Tool and Home Energy Cost

Estimator API service from National Renewable

Energy Laboratory

The RESNET National Registry allows a public user to

enter a street address at https://www.hersindex.com/

hers-rated-home-search/ to determine if that home

has a HERS rating. If the home does have a HERS

rating, then the following information is provided:

rating company that rated the home, date that rating

was completed, and the HERS Index Score of the

home. RESNET also offers an API service that can be

used to retrieve HERS records for a given address.

The Home Energy Labeling Information eXchange

(HELIX) is a multi-state project that aims to automate

the transfer of home energy data to Multiple Listing

Services (MLSs) across the Northeast region. HELIX

will make home energy information accessible to local

MLSs and other market interests (e.g., assessors,

appraisers, energy efficiency programs and service

providers, lenders, and energy code officials),

ultimately making the energy efficiency of homes

visible and better understood at the time of sale or

rental. Although HELIX focuses on the Northeast

region, it aims to provide a replicable, open-source

model that can be used throughout the country. The

project will include training delivered to real estate

professionals as well as continuous engagement with

stakeholders in the real estate market to ensure a

useful and effective product. For more information on

HELIX, visit https://neep.org/home-energy-labeling-

information-exchange-helix.

The Green Building Registry (GBR), developed by

Earth Advantage, is a software-as-a-service system

that aggregates green building data and makes it

available through a public search website and an

API to which listing services can directly connect.

The system went live in late 2017 in conjunction with

the City of Portland Home Energy Score program. It

directly auto-populates listings in the state’s largest

MLS and transforms Home Energy Score data into a

locally branded, two-page label format that provides

local energy prices, local carbon information, and

actionable linkage to contractors, financing products,

and incentives. In 2018 the GBR deployed state-level

reports based on Home Energy Score and HERS

data that align with the NASEO-endorsed EMPRESS

recommendations for home energy labels.

GBR contains all of the HERS Index ratings in the

RESNET National Registry; the green certification

data from LEED, NGBS, and the major regional green

certifications; solar data from select localities;

and Home Energy Score reports from select HES

Partners. GBR contains over 1.7 million third-party

verified home performance records. GBR has also

integrated the Home Energy Cost Estimator tool

from NREL to provide a reference value against

which verified energy cost estimates from ratings

can be compared. The GBR API is available to the

MLS systems nationwide. For more information

on the Green Building Registry, visit https://www.

greenbuildingregistry.com.

www.rmi.org

55Build Back Better Homes

The ResStock™ analysis tool is helping states,

municipalities, utilities, and manufacturers identify

which home improvements save the most energy and

money. Across the country, there’s a vast diversity

in the age, size, construction practices, installed

equipment, appliances, and resident behavior of the

housing stock, not to mention the range of climates.

These variations have hindered the accuracy of

predicting savings for existing homes. With support

from the US Department of Energy (DOE), researchers

at NREL developed ResStock. It is a versatile tool that

takes a new approach to large-scale residential energy

analysis by combining:

•

Large public and private data sources

•

Statistical sampling

•

Detailed subhourly building simulations

•

High-performance computing

This combination achieves unprecedented granularity

and, most importantly, accuracy in modeling the

diversity of the single-family housing stock. With

NREL supercomputing, the ResStock team has run

more than 20 million simulations using a statistical

model of housing stock characteristics. With this data,

researchers have uncovered $49 billion in potential

annual utility bill savings through cost-effective

energy efficiency improvements.

Detailed information on the technical and

economic potential of residential energy efficiency

improvements and packages is available for 48 states

domestically. Policymakers, program designers,

and manufacturers can use these results to identify

improvements with the highest potential for cost-

effective savings in a particular state or region, as well

as to help identify customer segments for targeted

marketing and deployment.

In 2020, NREL researchers used the ResStock

database to create the Home Energy Cost Estimator

tool described in Appendix D to produce a relatively

conservative estimate of energy consumption and cost

for any home in the United States.

For an example of how this data can be utilized, this

home record (https://us.greenbuildingregistry.com/

green-homes/OR10009268) shows that a home built

in 1912 has a poor Home Energy Score of 1. However,

the verified energy cost estimate (ECE) of $2,261/year

is substantially lower than the reference ECE provided

by NREL, which is $2,900/year. Reviewing the home’s

HES report (https://rpt.greenbuildingregistry.com/

hes/OR10009268.pdf) shows the home already has

an efficient furnace and some insulation installed, but

it could save another $681/year if straightforward

cost-effective improvements are made that have

paybacks of 10 years or less.

Another example would be this new home built in

2020 (https://us.greenbuildingregistry.com/green-

homes/OR10188324) that has a verified ECE of

$970/year from an HES report. This is compared with

a reference ECE from NREL of $1,450/year that might

be expected from a code-built new home of the same

size in this location.

Why Asset Ratings versus

Utility Bills?

Home energy costs can be derived from either asset

data (via ratings like HERS and Home Energy Score

and tools like NREL’s Home Energy Cost Estimator)

or operational data such as from utility bills. Asset

ratings provide modeled information using data about

a home’s design and physical characteristics to reveal

intrinsic energy performance with standardized

assumptions about how it is operated. Utility bills

provide operational data based on actual energy

use, occupancy, and behavior, which can change

significantly when a home’s occupants change (e.g.,

an elderly couple selling their home to a family of six).

This makes asset data and ratings more useful in the

context of real estate transactions and transfers of

ownership. For more on this distinction, visit https://

empress.naseo.org/home-energy-labeling-tools.

In addition, analysis by the EMPRESS project team

found that there are several laws that ban the sharing

of utility data, but there are no laws banning the public

sharing of asset ratings as of this writing. Please

see “Considerations and Best Practices for Publicly

Disclosing Energy Information” in the EMPRESS final

report for more detail: https://empress.naseo.org/

Data/Sites/21/media/documents/empress-project-

final-report_v1[1].pdf.

www.rmi.org

56Build Back Better Homes

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2695bn-green-issuance-2020-late-surge-sees-

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more-100-million-single-family-green-mbs-

april-2020.

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57Build Back Better Homes

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58Build Back Better Homes

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59Build Back Better Homes

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60Build Back Better Homes

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