Building Green – Got Money?

No? Got to get a mortgage.  Or at least try and try again.

We needed to place a mortgage on our new home, not just for construction but a permanent mortgage.  As part of our planning, I started exploring construction loans with two general sources: first tried our long-time bank, then our long-time credit union and then USAA (who offers mortgages as well as insurance); secondly, spoke with a local bank here in Silver City with a good reputation, Western Bank.  Our credit union proved not to be an option because they aren’t local enough and USAA, the same.  They both could help with the permanent mortgage, but that wasn’t my immediate concern – or so I thought.  One phone call to our long-time bank sadly convinced me that customer service wasn’t their immediate concern! When it came time to move from planning to financing, we went with Western*.

Western could provide us with the construction loan, but they don’t hold permanent mortgages; they resell them onto the secondary market.  This is typical of almost all banks, whether local or national.  It’s how lenders like Citi Mortgage and the infamous CountryWide became and remain such giants in the mortgage market.  It’s also where our challenges began.

We had no problem qualifying for a mortgage to bridge the difference between the cost of the house and our assets from the sale of our previous house in MD. We were close to the ideal borrowers for a mortgage: no debt to speak of; home ownership for most of our adult lives; good credit rating; and enough assets to make 30% or better down payment; that after paying off the land purchase. Looking for a typical 30-yr fixed, nothing exotic. So where was the problem?!

The problem was green.  In retrospect, I’m still stunned that there’s such a discrepancy – nay, a chasm between talking green and doing green when it comes to financing.

The first loan application to a secondary mortgage company produced the following results, although mostly this is a reconstruction (forgive the pun) of events based on a couple of phone calls.  The appraiser picked up the house plans and went to work. He did a very good job of researching recent comparable sales and general market conditions.  Appraisals are, of course, based on what’s sold – comparable sales – not what’s on the market or what other homes cost to build.  The market sets the value.  Therein lay the first problem: NO green comparables. We anticipated that this could have a negative impact on the house valuation – or at least be neutral. 

Because there had been no homes sold in this region in the last 2-3 years with passive solar design, solar photovotaics or solar thermal, there was no value that could be assigned to those features.  Same with the high performance windows. Same with the other elements of design that set the house apart from typical construction.  Not that there were no homes in the region that have these features – just that none had been sold.  Again, the market sets the value.

The appraisal was submitted to the lender as “conforming with the neighborhood.” That meant that the size, style and construction (frame/stucco, without regard to the green elements) is similar to the other homes in the general neighborhood.  The solar PV and solar thermal was noted on the appraisal along with the other key green design elements, even though no dollar value was added.  If I understood the situation correctly after the fact, the bank contacted the appraiser and instructed that the appraisal be changed from “conforming” to “non-conforming.”  And then turned down the loan application as being “non-conforming”! Ouch.  Don’t explain to me that lenders are very risk averse right now, though that might be the truth.  Don’t tell me that they only want to loan money against “plain vanilla” houses, though that may also be true.  Something about this whole deal smelt!  Yes, truly fishy!! Actually, downright illegal, given that appraisals are supposed to be blind, such that the local bank can’t recommend a particular appraiser and the lender can’t direct the appraisal.  But this was the story as I got it.

I did a lot of internet research and spent hours on the phone calling banks around the state and even FreddieMac (or was it FannieMae).  The reason I spent so much time is that everywhere I looked on the internet, I found references to “green mortgages.”  I was determined to find that green needle.  What I found instead was:

·        Build Green New Mexico’s website listed two lenders that purported to make green loans.  I learned through personal phone calls that one was out of business and the other only made construction loans in Santa Fe and sometimes Albuquerque. 

·        There was and is lots of information on the internet about Energy Efficiency Mortgages, sponsored by HUD/FHA (EEMs) a program started in 1995 by FHA to help homeowners finance the cost of the energy efficiency technology, such as solar pv, solar thermal and wind.  The program is supposed to apply to both new home and renovation/additions to existing homes.  I also found a lot of information on the National Association of Realtors website.  However, after a number of calls to lenders and banks, I found no one – not a single one who’d ever heard of EEMs.

·        When I called FannieMae (or was it FreddieMac) they refused to talk with me, the consumer. I was told that they only talk to lenders. Not what I wanted to hear.

Those are the highlights of several hours on the phone. Meantime, Western worked diligently to present us with options.  The best option was to have them submit our loan package to another secondary lender.  Which entailed another application, another appraisal and another appraisal fee.  Different appraiser this time.  Thankfully, different results. Although the second appraisal still didn’t assign any market value to the solar, etc, at least the appraisal came in at a value that allowed the mortgage to be guaranteed.  Thus, Western was able to proceed with the construction loan.

And all it cost us was a 4 month delay!  Well, plus the additional appraisal fee.

I’ve since learned that in other areas of the country there is an effort to assign value to the technology of green construction.  In places like Santa Fe, the appraisal forms and even house listing forms are now including check boxes for green elements like solar pv, solar thermal, etc.  That means that a database of market value will begin to be built on how much a house with those elements sold for. Which in turn means that lenders will begin to appraise the value and loan against the value of the green elements.  And maybe even EEMs will make a debut somewhere other than on government programs and websites.

About time, I’d say.

*Western’s reputation is well deserved.  They have worked with us every step of the way, going far above and beyond to help get us financing.  What a difference from the national bank where we and I have had accounts since I was knee-high to my dad and through 4 mergers!