GREEN AND ENERGY EFFICIENT HOUSING
On March 31, 2016, HUD published a final rule reducing mortgage insurance premiums (“MIP”) for qualifying Green and Energy Efficient Housing. As February 2022, data on this incentive is published on FHA’s website and integrated into Ginnie Mae’s mortgage-backed securities (“MBS”) disclosure data. As of January 1, 2022, over 1,800 FHA multifamily properties have qualified.
For borrowers utilizing FHA-insured financing, this incentive is intended to encourage multifamily property owners to adopt higher standards for construction, rehabilitation, repairs, maintenance, and property operations that are more energy efficient and sustainable than traditional approaches to such activities. Owners are incentivized to implement measures that result in projects with greater energy and water efficiency, reduced operating costs, improved indoor air quality and resident comfort, and reduced overall impact on the environment. For properties that have already achieved a green building standard and that are refinancing with this lower MIP premium, proceeds may be used to complete further efficiency upgrades, and/or to retrofit to the next-level green certification standards.
For investors in Ginnie Mae MBS, green building disclosure provides additional transparency of loan collateral quality. Further, such disclosure—along with HUD’s underwriting policies—provides investors with the facts needed to assess environmental, social, and governance (“ESG”) factors. ESG investing has grown in popularity in recent years, and this disclosure supports investment selection for buildings that are certified to be energy efficient during HUD’s loan underwriting process.
General Underwriting Requirements for Green MIP
FHA’s Multifamily Accelerated Processing Guide (“MAP Guide”), Chapter 6, provides the technical requirements that lenders must follow during loan underwriting. It is the responsibility of the Lender and Borrower, acting in concert with the Project Architect, to select a certification appropriate for their proposed project, and to ensure that the property will meet continuing performance requirements including annual whole building data reporting.
Green Building Certifications
Multiple organizations sponsor and maintain green building certifications. Accepted certifications are as follows:
For new construction and substantial rehabilitation buildings, MAP Guide Chapter 6.3.1.B specifies the following: Enterprise Green Communities Criteria; LEED-Home, LEED Home Midrise and LEED-New Construction; ENERGY STAR® New Construction Single Family (covers 1 and 2 family structures and townhouses); ENERGY STAR® New Construction Multifamily; ENERGY STAR® Multifamily Hi-Rise; EarthCraft House and EarthCraft Multifamily; Earth Advantage New Homes; Greenpoint Rated New Home; National Green Building Standard; Passive Building Certification from Passive House Institute US or International Passive Housing Association; and Living Building Challenge from the International Living Future Institute.
For existing buildings, MAP Guide Chapter 6.3.2.A specifies the following: Enterprise Green Communities Criteria; EarthCraft House and EarthCraft Multifamily; Greenpoint Rated Existing Home-Whole Building Label; and National Green Building Standard.
MAP Guide 6.4.1 describes Continuing Performance requirements. All Borrowers with loans endorsed at green MIP rates and secured by properties of 20 or more units must annually demonstrate continuing performance by delivering to HUD an ENERGY STAR® Statement of Energy Performance (SEP) showing an ENERGY STAR® Score of not less than 75.
Per MAP Guide 6.4.3, the borrower must execute certifications that evidences the applicant’s commitment to achieve and/or deliver an indicated green building certification. See form HUD-91070M. In addition, HUD’s Office of Asset Management and Portfolio Oversight (OAMPO) provides instructions to Borrowers and Lenders on how to comply with green MIP continuing performance requirements in Mortgagee Letter 2020-1 (ML 2020-1).
HUD Regulatory Agreement Rider 5
MAP Guide 6.4.4 requires execution of Regulatory Agreement Rider 5 at loan closing. This document obligates the Borrower to complete all construction as well as any and all tests, evidence, or assurances as may be necessary to perfect and obtain the selected green building certification. In addition, Rider 5 specifies the Borrower’s on-going energy performance obligations during the life of the insured mortgage.