Is Green Lending Your New Mortgage Niche?

By: David Reinholtz
The hot topic in real estate is green homes. People are building, buying, and remodeling existing homes to make them more energy efficient, healthy, and have less of an impact on the environment. While it is a fairly recent trend in housing, it started in commercial building more than two decades ago as owners looked for ways to cut rising utility bills. The field quickly grew beyond a concern with energy to incorporate materials, techniques, and products that conserve scarce resources, recycle used materials, and avoid the use of toxic ingredients and processes. As better and cheaper products and materials became available, green or eco-friendly building spread to residential construction.

Green building is fast becoming the norm for new commercial projects, but it isn't clear how many houses are actually being built with energy saving and environmentally friendly features because the statistics still conflate commercial and residential markets. In 2006, McGraw Hill Construction estimated that by this year green building would represent 10 percent of all construction and the president of the U.S. Green Building Council (USGBC) said last April that green construction had contributed $178 billion to the gross domestic product during the previous eight years. But in neither case do we know if residential building represents 20 percent or 90 percent of those figures. There is anecdotal evidence, however, that green building is a growing factor in both new residential construction and remodeling. For example, the State of California just enacted the first statewide "green" building code and 6,500 builders have signed on to build Energy Star approved homes. USGBC's LEED program which originally monitored green commercial construction now offers five levels of certification for housing. We can also assume that however big green home building is today, it will get bigger; to what degree is still an unknown.

So far there hasn't been a lot of news about financing green homes, partially because a special mortgage would be overkill for many purchases. A lot of green building merely reflects new technology applied to old products such as Low-e (low emission) coating on window glass or formaldehyde-free kitchen cabinets. Where a green house is just a regular home with green features, a plain vanilla mortgage will work just fine.

Nonetheless, some environmentally sensitive homes do have financing issues. A subset of very green homes such as domes, Yurts, and earth bag homes are growing in popularity but many projects do not get off the ground because the chosen construction methods, while valid, confound appraisers or scare lenders. Even ordinary homes that have a single unique feature such as a geothermal HVAC system or solar embedded roofing shingles can run afoul of underwriting guidelines. Construction loans are also an issue. Think of all the usual problems inherent in placing construction financing for a single family home and quadruple it if the house is really green. Building codes have not yet caught up with green technology - it is another year until even California's new regs take effect - nor have many of the loan officers who must sign off on construction advances.

There are green mortgages available but so far they aren't widely known. FHA offers a wrinkle to its 203(b) and 203(k) loan guidelines that permits recognition of the cost savings of green improvements. The Energy Efficient Mortgage (EEM) program allows the borrower to incorporate the cost of some green improvements on the top of the approved mortgage without qualifying for the higher loan amount or basing the down payment on it. Freddie Mac, Fannie Mae and VA mortgages offer similar concessions and Energy Star, a joint effort of the EPA and Department of Energy, has a pilot program underway which, in addition to the features of the FHA program, encourages lenders to offer preferential rates, reduced fees, or lower closing costs to borrowers. There are caps on most of these EEM programs but they are still useful, especially where customers are pushing the limits of their ratios.

It would appear that, at present, green home financing has the following characteristics: 

* The size of the potential market is unknown. 
* There is an unmet demand for creative products in some sectors. 
* Programs are that are available are not being appropriately marketed and promoted. 
* No one really understands what is going on. 
* Not many people are doing anything about it.

Sounds like the very definition of an opportunity. There appears to be a need for entrepreneurs who understand what is going on out there and some excellent reasons to position yourself as a green financing expert.
It is a pretty empty niche. If there are lenders specializing in green loans they are doing a poor job of marketing. Google green mortgages, green lenders, or green mortgage brokers and you will get millions of hits but the top ones lead to blogs bemoaning the lack of green financing or to the Websites of mortgage brokers named Green. USGBC's national green directory lists only six financing sources. The National Association of Realtors offers members a green designation, the Mortgage Bankers Association does not. 

Becoming the green mortgage expert in your area code or even staking a national claim to the title would not be difficult. First, learn the basics of green building and green home ownership. Most of the methods and terminology are pretty simple and there are dozens of books and Websites to get you started. It is important that you are familiar with the underlying concepts of green building such as sustainability and, while you should be aware of materials and products, technical knowledge is not required; it is good to know what a geothermal heat pumps is but not necessary to know how it works.

Learn who the players are. LEED, USGBC's Leadership in Environmental Education and Design program mentioned above, is one of the gatekeepers, establishing standards for green building and for professionals in the field. Energy Star has long rated appliances and other products for energy efficiency and is now doing the same for new homes. The National Association of Home Builders is active in developing green residential building standards and the Forest Stewardship Council certifies the sustainability of wood-based building materials. You will quickly learn about another dozen or so organizations and agencies which are active in the field.

Qualify for existing programs such as those offered by FHA or the pilot Energy Star program. If you are in a position to do so, develop programs of your own. Talk with your investors about this potentially explosive market and how you might capitalize on it. If you can develop a conduit for financing some of the more extreme building techniques, you will be a market maker. Techniques such as straw bale building have a long history, are structurally valid, and are growing in popularity, but can be mortgage orphans.

Be prepared to educate appraisers and insurance agents. A lack of comps or the ability to secure hazard insurance kills a lot of green financing. There is no reason a home with a conventional gas furnace cannot be a comp for one with a geothermal system and when an insurance agent balks at insuring a straw bale house he needs to know those houses have four times the burn rating of stick construction. You will sometimes have to force these people to lift their heads out of their rule books.

Marketing a green business focus is easy and relatively inexpensive. 

Contact green builders in your area as well as realtors, especially any holding the NAR green designation. Qualify as a partner with Energy Star at http://www.energystar.gov/index.cfm?c=bldrs_lenders_raters.pt_lender_benefits. If you can provide financing for any of more outr building techniques, contact and post on the dozens of blogs that support their use; financing is a big topic of discussion. Advertise in the USGBC and NAHB directories and, depending on your focus, in community directories in green conscious cities such as Austin, Texas; Portland, Oregon; and Cambridge, Massachusetts.

The trend to green building could become a mega trend; develop into the industry standard, or merely remain a small and healthy market sector. Mortgage lenders who start to focus on this market early could find a steady flow of new business or a potential bonanza. In any case, they will be ahead of the curve when the competition finally discovers the market.

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