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Statement of Need: The Report identified several barriers that have prevented a self-sustaining retrofit market from forming. Among other barriers, the Report found that homeowners face high upfront costs and many are concerned that they will be prevented from recouping the value of their investment if they choose to sell their home. The upfront costs of home retrofit projects are often beyond the average homeowner’s budget. The report found that the solution to the lack of home energy retrofit financing is to make such financing more accessible and more consumer friendly. The proposed regulatory amendments will help to address these needs by enabling qualified borrowers obtain title I low cost loans for energy-related home improvements.

Summary of the Legal Basis: The Title I program is authorized under title I, section 2, of the National Housing Act (12 U.S.C. 1703). Specifically, under section 2(a) of the National Housing Act, the Secretary of HUD is authorized to help homeowners finance alterations, repairs, and improvements in connection with existing structures or manufactured homes. HUD’s implementing regulations are codified at 24 CFR part 201.

Alternatives: The primary alternative HUD considered to amending the Title I regulations was use of the existing FHA Energy Efficient Mortgage (EEM) program. The FHA EEM program allows a borrower to finance and incremental amount on their first mortgage to invest in energy efficiency, with an additional appraisal or further credit qualification, provided that the benefit of projected energy savings exceed the cost of the improvements, as estimated by an energy audit, HUD ultimately determined that the EEM was not an optimal vehicle for achieving the energy innovation goals of this rule. First the FHA EEM is, by definition, a negative equity instrument, and negative equity is extremely problematic in the current housing market. Another problematic feature of the EEM program is that the financing may exceed the benefit from and useful life of the measures, and result in a total net cost to the consumer that does not represent the optimal use of funds.

Anticipated Costs and Benefits: The aggregate net benefits are obtained by multiplying the individual net benefits by the expected number of loans and adding the expected social benefits of reduced energy consumption. As a base case, HUD assumes a consumer household with annual savings of $1000, a zero percent price growth and a 7 percent discount rate. The present value of a technical retrofit for this base case scenario is $11,400. Assuming a rebound effect of 30 percent yields a comfort benefit of $3,400 and energy savings of $8,000 per participant (the "rebound effect" refers to the fact that the reaction of the consumer to the energy-saving technology will not necessarily reduce energy consumption by what is technically possible). Approximately 24,000 loans are expected over two years. For the base case scenario, this would equal $41 million comfort benefits and $96 million in energy saving for each year of the program. The benefits of the FHA program may not equal the sum of the benefits of all retrofits financed through the program, but only reflect the benefits of the retrofits that would not have occurred without the program; however, the existence of significant market imperfections and the lack of affordable financing makes it reasonable to assume that a large proportion, if not all of the loans, will generate benefits. The cost of receiving the energy-savings is the upfront investment plus the costs of financing the investment. the cost per investment is thus equal to the size of the loan.

Risks: This rule poses no risk to public health, safety, or the environment.