Energy-Efficiency Loans See Few Defaults, But Banks Still Mostly Not Interested

Washington, D.C.—A new report by the American Council for an Energy-Efficient Economy (ACEEE), “What Have We Learned from Energy Efficiency Financing Programs?” finds that energy-efficiency loan programs for building upgrades have exceedingly low default rates, ranging from 0 percent to 3 percent. The report drew its conclusion from a review of 24 energy-efficiency loan programs.

Though the report wasn’t specifically about multifamily properties, as major users of energy in the context of building efficiency, multifamily property owners (and their residents) certainly stand to benefit from successful energy-efficient retrofits of their properties. For example, the annual utility bill for the U.S. Department of Housing and Urban Development’s roughly 5 million units of affordable housing is more than $4 billion, an estimated 20 percent to 30 percent of which could be saved with energy-efficient retrofits.

Energy-efficiency loan programs finance building upgrades by providing funding directly to building owners or managers. According to the ACEEE report, small commercial banks and credit unions have led in offering these energy-efficiency loan products, often working with utilities as well as local and state governments. The programs evaluated by the report have loaned out over $1.5 billion. Through the use of subsidies and energy program funds, interest rates for borrowers averaged 3 percent to 5 percent annually.

The reasons for the dearth of investment by large banks, the report says, appears to be a lack of centralized information on how the loans are performing and the inability to evaluate default risks. Furthermore, each loan tends to be small, averaging $9,000 for residential projects and $73,000 for larger commercial properties or multifamily projects. The low dollar amounts of these loans suggest that to attract the interest of large financial institutions, the loans would need to be packaged for resale on the secondary market.

“The local lender may issue $20 million in loans, or perhaps a collection of firms will issue $50 million, but when they reach capacity there is no secondary market in which to sell the loans,” the report notes. “Thus, there is no way to recapitalize for additional lending. Further, local firms employ underwriting and loan terms that often do not conform to the standards used by national banks and institutions. The fragmented universe of local lenders is limiting the secondary market, while local lenders remain the only option to tap private capital, a conundrum that is preventing the market from scaling beyond pilot programs.”

Thus, existing loan programs have only begun to scratch the surface of the potential market, the report further asserts. The programs reviewed represent the largest energy-efficiency financing efforts in the nation, yet participation rates are most often less than 0.5 percent of the targeted customer class.

According to the report, providing data on default rates is a first step in building a more sophisticated lending environment for energy retrofits of residential and commercial properties. “Low participation rates indicate there is a vast untapped customer base still available in this market,” writes Sara Hayes, lead author of the report. “I think we’ll see increased private investment as big banks adopt the model that community banks and credit unions have found so profitable.”