FHA PowerSaver Mortgage Now Available

by Peter G. Miller
April 28th, 2011

HUD is out with a newly-minted FHA loan, the PowerSaver, and it’s a program that represents better than half a good idea.

Under the PowerSaver program as many as 30,000 homeowners will be able to borrow up to $25,000 for selected energy-efficient home improvements. The loans can be outstanding for as long as 20 years and interest rates are expected to range from 5 to 7 percent. Eligible improvements under FHA guidelines include such things as insulation, duct sealing, energy efficient doors and windows, energy efficient HVAC systems and water heaters, solar panels and geothermal systems.

“PowerSaver loans,” said HUD, “will only be available to homeowners who have the wherewithal and motivation to make energy improvements to their home. Borrowers must have credit scores of at least 660 and their total debt to income ratios cannot exceed 45 percent. The combined loan-to-value ratio for all loans on a home, including the PowerSaver loan, cannot exceed 100 percent.”

Ah, and there we have a problem.

You can understand that HUD is justified in wanting a 660 credit score–not a big deal given that typical FHA borrowers now have credit scores of 703. And you can easily understand the 45 percent LTV, a back ratio that includes both housing costs and recurring monthly debts. This is 2 percent more than the standard FHA back ratio of 43 percent, but a standard justified by the energy savings which should be produced from the improvements financed under the PowerSaver plan.

But–and this is a big one–there is the business of that loan-to-value ratio.

HUD is entirely right in not wanting to make loans which exceed the value of the property. That makes sense. HUD would actually be more right if it said the loan-to-value ratio of all financing was less than the value of the property.

The catch is that in today’s world huge numbers of properties are underwater. The value of the property is less than the mortgage balance. Especially in the nation’s foreclosure centers–such states as California, Florida, Nevada, Arizona, Michigan, Georgia, Ohio, Illinois and Texas according to RealtyTrac–the PowerSaver program is a non-starter.

These are precisely the areas where help is needed to raise home values. It would be terrific if homeowners were able to increase property prices by making their homes more attractive in the marketplace through lower energy costs and higher environmental standards.

You can’t blame HUD. FHA mortgage financing is an insurance program and HUD, being financially sensible, cannot be in the position of starting a program which is destined to produce large numbers of claims.

And there is the conflict. The PowerSaver program is a very good idea. In a perfect world one could argue that the entire housing stock should be retro-fitted so there’s less need for energy, less demand to build new electrical generating stations. If the economy was in better shape the PowerSaver program could be enormously popular, but the reality is that while 30,000 PowerSaver loans–the number expected to be initially insured–are a good idea we won’t get a chance to see the economic and environmental impact that several million PowerSaver mortgages would make.

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