As I recall from my time in the Senate, there’s nothing like an energy bill to attract misguided proposals. This week the Senate begins consideration of S.2012 — the Energy Policy Modernization Act of 2015. Among the almost two hundred filed amendments is a proposal (Amendment #3042) from former real estate broker, Senator Isakson, to mandate that the Federal Housing Administration (FHA) reduce the quality of its loans in order to encourage more efficient energy use.
The two most concerning aspects of Amdt 3042 are 1) it would allow “estimated energy savings” to be used to increase the allowable debt-to-income (DTI) ratios for the loan and; 2) require “that the estimated energy savings…be added to the appraised value…”
These changes might not be so bad in the abstract but when combined with existing FHA standards, they set the borrower up for failure and leave the taxpayer holding the bag. Let’s recall that borrowers can already get a FHA mortgage at a loan to value (LTV) of 96.5%, and that’s assuming an accurate appraisal. If borrowers were required to put 20 percent down, then this amendment would be a minor problem, but under existing standards, borrowers would mostly likely leave the table with an LTV over 100%, that is already underwater before they’ve even moved in. Did Congress learn nothing from the crisis?
The increase in DTI might not matter if FHA did not already allow a DTI as high as 43% of income. Under Amdt 3042 borrowers could easily leave the closing table devoting over half their income to their mortgage. Again, did Congress learn nothing from the crisis?
To illustrate that the intent of the proposal is to have the taxpayer take more risk, Amdt 3042 actually prohibits FHA from imposing any standards that would offset this risk. If these new loans perform worse, as one would expect, FHA cannot put them back to the lenders. And let’s not forget FHA allows the borrower to have a credit history deep in the subprime range. So you could have a subprime borrower, say FICO down to 580, LTV > 100% and DTI > 43% - what could go wrong?
If indeed energy savings actually increased the value of the home, that would be reflected in the price. There would be no need to mandate such. Not only does this proposal weaken FHA standards, and expose the taxpayer to greater risk, it takes us further down the path of an already politicized housing policy, where instead of relying on market prices, values are dictated by Soviet-style bureaucratic guesswork.