Energy Backed Securities
Homeowners, mortgage bankers, lenders, secondary mortgage market institutions (SMMIs), utilities and investors could benefit from an energy program that would provide two innovative approaches:
They would work the same way Fannie Mae and Freddie Mac promote homeownership and make money. They make money on the difference between loans they buy and their borrowing costs, guarantee fees charged to lenders on mortgage-backed securities sold to investors and returns on the sale of mortgage-backed securities. Put another way: as wholesalers for the mortgage industry, Fannie and Freddie borrow money from investors to buy mortgages from lenders. They also repackage mortgages into securities for sale to investors, adding their own guarantee that investors will receive the promised principal and interest. They charge lenders a fee for that service.
Secondary Energy Mortgage Market
Fannie Mae, Freddie Mac, mortgage bankers, secondary mortgage market institutions (SMMIs) and other lenders should launch innovative financing programs to assist homeowners with their energy bills and the installation of energy efficiency retrofits. SMMIs should provide support for lenders to purchase homeowners energy bills as part of the mortgage, bundle the energy bills as futures and either include them in mortgage backed securities, or offer the option of separating them into energy backed securities (EBS). Just as it is reasonably assured that the vast majority of homeowners will pay their mortgages, they will pay their utility bills. The energy savings component could be leveraged as the equivalent of a monthly interest rate in a separate EBS. If consumption is treated as an energy future and folded into the mortgage, energy savings from the projected amount financed would reduce the monthly mortgage payment for the homeowner and provide an investment opportunity as an EBS. SMMIs would help reduce monthly mortgage payments by homeowners, purchase larger loans from lenders, and achieve a return on investment through the issuance of EBS.
The incentive for lenders to participate will be the inclusion of the total estimated energy usage during the mortgage in the mortgage purchase price. For example, a secondary mortgage market institution (SMMI) assuming a $2,000 per year energy bill over a 30-year mortgage could purchase a $150,000 mortgage for $210,000. The SMMI would have a larger mortgage backed security (MBS) to offer to investment markets and the energy savings would be calculated to reduce the energy consumption mortgage add-on. Energy savings would be quantified through the lenders and utility companies. Compliance would be assured through remote monitoring, random on-site inspections and consumption analyses. A one-fourth to one-third increase in the amount of the purchase price of the loan will provide sufficient incentive to lenders to participate in this program.
Credit Trading Market
America should also establish a credit trading market for energy savings from home energy efficiency retrofits. Residential units account for approximately one-third of energy consumption and 19% of greenhouse gas emissions. Building more efficient homes, or retrofitting existing ones, can dramatically decrease the amount of energy used. This also reduces utility costs for homeowners. While energy savings from one home alone are small, the results are substantial when the energy reductions from many homes are aggregated. Of course, individual homeowners could still decide to manage their own energy efficiency credit asset.
Creation of Credits
Energy efficiency improvements to homes can be accelerated if utilities, in partnership with lenders and SMMIs, implement aggressive demand-side management programs, consumer upgrades, and builder incentives. On a per house basis, these energy savings are too small to generate significant levels of energy offsets from electricity generation. However, if the individual energy savings are aggregated in sufficient levels, they could represent a tradable commodity in existing and future energy trading markets. SMMIsand other entities could also aggregate these savings to market as emission allowances in U.S. and foreign trading markets under a future U.S. carbon dioxide reduciton program or the Kyoto Protocol if it is ever implemented. A private, voluntary market could also be established in the U.S. SMMIs will define acceptable energy efficiency improvements and determine baseline and measurement calculations to quantify these improvements. A credit will equal either one million British Thermal Units (Btus). Savings from home energy loans could be included in the trading system or treated separately as an asset for the energy backed securities.
Criteria for Calculating Energy Credits
To participate in the program, homes and apartments would have to meet minimum energy efficiency criteria. Efficiency improvements beyond this baseline would be measured using the Department of Energy Home Energy Rating System (HERS) or another comparable rating. These minimum energy efficiency criteria will assure the quantity of energy reductions and improve the quality of the energy credits created. Participating lenders and homeowners may qualify to earn energy credits based on the energy reductions achieved.
Validating the Credits
A monitoring and verification protocol will have to be developed to establish a credit-trading program. They will register the energy credits under the EIA 1605(b) program and any other relevant program to best validate the energy savings and promote their marketability. To date, the energy reductions from residential energy efficiency programs are not creditable and have no market value, primarily because no one entity has been able to amass them in sufficient quantity. SMMIs can aggregate a tradable number of credits by working in partnership with builders, utilities, and other partners.
Trading Energy Credits
SMMIs will ensure a sufficient level of monitoring and verification, register the emission credits under the relevant regulatory programs, and amass them in sufficient quantity to offer them for sale to the market. An energy brokerage service will negotiate the sale. Those under some calculated cap could sell credits and those over the cap would purchase credits. Caps could be established locally, by State, regionally and nationally. Other innovative trading systems could also be created.
Benefits to Home Buyers
Energy efficient homes are more comfortable to live in and significantly less expensive to maintain than inefficient homes. Efficient homes also have greater value, as they are more durable and perform better than the standard-built house. However, while energy efficient appliances and construction techniques are common, many individuals cannot afford the up front costs. The goal of this initiative is to promote the development of energy efficient homes by capturing the value of the energy savings and reinvesting the proceeds of the sale of energy credits back into the utilities energy efficiency programs.