How the CFPB could help achieve President's goal to reduce wasted energy in houses
Posted January 10, 2013
In the State of the Union address, President Obama issued a new goal for America: "Let's cut in half the energy wasted by our homes and businesses over the next twenty years."
Here's one place the Administration should focus: Improving the mortgage loan process so that lenders and homebuyers are able to consider the actual cost of buying a house that wastes lots of energy -- or, stated differently, helping lenders and homeowners to consider the savings that come from living in a house that will cost less to heat and cool.
One note of background: In the wake of the 2007-2008 financial crisis, Congress passed the Dodd-Frank Act. One key objective was to protect the country from the widespread effects of irresponsible mortgage lending. The Act created a new agency -- the CFPB -- and directed the new agency to issue rules on how mortgage lenders should evaluate a loan applicant's "ability to repay" a loan.
The CFPB is positioned to lead lenders to both minimum standards and best practices for assessing a loan applicant's "ability to pay."
Intuition stongly suggests transportation expenses and utility expenses are relevant to some homeowners' ability to pay their mortgage -- these expenses are material parts of the household budget for many families and make a difference to affordability of the mortgage payment.
The intuition is supported by evidence presented in several papers -- See HERE for paper on effects of household energy expenditures on mortgage delinquency. Here for paper on effects of transportation expenses on mortgage delinquency. Here for a paper on how some homeowners capitalize some portion of energy savings into purchase price. Here for a paper on evidence that gas price increases trigger mortgage defaults.
Better data -- especially loan level data -- is essential, and the CFPB is poistioned to lead. HERE is a copy of a letter we sent to the CFPB that provides a full description of the problem and a roadmap for needed research and action.
Reducing wasted energy in the nations' houses -- over 70 million single family houses, 30 million apartments, 8 million mobile homes, etc. (according to census figures) -- will require many initiatives.
An essential first step is understanding what the data show -- how do energy expenses vary across different kinds of houses? how do different expenses affect borrowers' ability to pay a mortgage? what factors predict energy expense levels? Borrowers, lenders, and their regulators, should not be left to make assumptions and guesses.