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Home Energy Efficiency and Mortgage Risks

Home Energy Efficiency and Mortgage Risks Download pdf
Publication Date: 2013 Author: Bob Sahadi, Sarah Stellberg, Chao Yue Tian, Nikhil Kaza, Roberto Quercia Program Area:Finance & Leasing

Many have theorized that energy-efficient homes should have lower default risks than standard homes because the former are associated with lower energy costs, which leaves more money to make the mortgage payment. However, few empirical studies have been conducted due to limited data availability.

This study examines actual loan performance data obtained from CoreLogic, the lending industry’s leading source of such data. To assess whether residential energy efficiency is associated with lower default and prepayment risks, a national sample of about 71,000 ENERGY STAR- and non-ENERGY STAR-rated single-family home mortgages was carefully constructed, accounting for loan, household, and neighborhood characteristics.

The IMT-funded study, by the University of North Carolina - Center for Community Capital, finds that default risks are on average 32 percent lower in energy-efficient homes, controlling for other loan determinants. This finding is robust, significant, and consistent across several model specifications. A borrower in an ENERGY STAR residence is also one-quarter less likely to prepay the mortgage. Within ENERGY STAR-rated homes, default risk is lower for more energy-efficient homes. The lower risks associated with energy efficiency should be taken into consideration when underwriting mortgages.

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Read the Executive Summary.

Read the fact sheet.