Home Energy Efficiency and Mortgage Risks

Abstract

As part of President Barack Obama’s Climate Action Plan, the Obama administration recently proposed that energy efficiency should be factored into mortgage underwriting upon the sale or refinancing of new and existing homes. Little empirical evidence unfortunately exists on the relationship between energy efficiency and mortgage risks. Using a unique dataset, we examine the performance of mortgages backed by ENERGY STAR certified homes. We find that default and prepayment risks are significantly lower in such certified homes. Even for ENERGY STAR-certified homes, more energy efficiency is associated with even lower loan risks. These results offer support for taking energy efficiency into consideration in the mortgage underwriting process. Because this research is the first of its kind, further research needs to replicate the present study with other datasets during different time periods and with alternative methodologies.