After nearly a decade of US overspending on largely non-green, energy-inefficient, low-density housing, our nation is in the midst of the largest bank bailout since the 1980s Savings and Loan crisis. Congress is responding by rushing through legislation that would allow the US Treasury to lend up to $300 billion to Fannie Mae and Freddie Mac, two gargantuan government-sponsored enterprises that now guarantee nearly 45 percent of the nation’s $12 trillion in mortgages.
No one has any idea how much this crisis will cost, because that depends on housing prices, which are still plummeting. But the ultimate cost to taxpayers will almost certainly make last March’s $29 billion Bear Stearns bailout look like spring training.
In this context it is entirely appropriate for the public to demand that Congress not just give the highly paid managers of Freddie and Fannie yet another blank check. Instead, we should seize the opportunity provided by this debt crisis to attack another dire problem–the energy crisis and the threat of catastrophic climate change.
Now is the time to create a green Fannie Mae and Freddie Mac. We need to be farsighted as we look to the next generation of houses. The goal must be to shift from underwriting energy-guzzling McMansions to a green lending strategy that protects us from energy inflation and the impacts of rapid climate change.
The idea of green mortgage lending is simple and straightforward. Over time, Fannie Mae and Freddie Mac should reward mortgage lenders who finance homes that meet two basic sustainability tests: green building design and “sustainable locations,” sites for new homes that take into account commuting costs and other costs associated with housing locations.
Green Home Design
The energy waste by homes and office buildings in the United States is enormous–according to the US Green Building Council, buildings account for more than two-thirds of electricity and wasted energy, and nearly forty percent of our national carbon dioxide emissions.
Given these basic facts, it is not surprising that interest in green building design is soaring, with builders exploring an astonishing variety of new, earth-friendly building materials, as the New York Times recently reported. Now is the time to reinforce this trend by ensuring that government mortgage lending supports this goal rather than undermines it.
Since at least the 1930s, encouraging universal home ownership has been an important national goal, which has received hundreds of billions of dollars in direct and indirect subsidies, by way of institutions like GSEs and the tax deduction for mortgage interest. With home ownership now exceeding 70 percent of the adult population, it is clear that we have made strong progress.
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However, despite all these subsidies, few special incentives have been provided to encourage energy-efficient design, especially by mortgage lenders. Indeed, since jumbo housing loans typically produce higher fees for lenders, and the emphasis has been sheer volume, the incentives have tilted way over in the direction of McMansions. As a nation we can no longer afford to be environmentally neutral when it comes to providing mortgages–institutions like Fannie and Freddie need to design explicit programs to reward mortgage lenders who encourage energy-efficient design.
Commuting Costs
With gas prices soaring, the annual cost of driving to work has become the equivalent to an extra month or two of mortgage payments for many homeowners. As one recent economic analysis concluded, this has “has dealt a major blow to consumer purchasing power, weighing most heavily on those metropolitan areas and suburbs where people have to drive the farthest.”
Housing markets are already taking this into account–for example, surveys of metropolitan areas from Boston to Los Angeles to Tampa show that home prices are falling fastest in more distant zip codes, while, other things being equal, homes that are closer to public transit have maintained strong valuations.
All this indicates the housing market is already automatically producing some incentives for less construction on the margin, in locations with higher commuting costs. However, to get ahead of the curve, the GSEs may want to provide additional incentives.
Floodplain/Coastal Zone Exposure
With record flooding devastating Iowa and other parts of the Midwest, and with global warming promising to create even more extreme weather, it is also time to revamp the country’s failed flood control policies. Mortgage lending policies should not escape scrutiny. An aggressive green lending program by Fannie Mae and Freddie Mac could help relocate homes out of hazard areas, rather than underwrite activities that enable building in high-hazard zones.
Our proposal to create a green lending initiative at Freddie and Fannie isn’t meant to address the serious changes that are no doubt needed in their approaches to bundling, securitizing and pricing basic mortgages.
It is about insisting that they recognize the powerful impact that housing has on energy consumption and the environment, and begin to use their muscle in the housing market to help construct a more environmentally and economically responsible future.
Congress should not just give these two institutions a blank check bailout that could run into the hundreds of billions and produce more business-as-usual lending. It needs to seize this opportunity to help us solve two very important crises at once.
We need to attach some green strings to all those billions of greenbacks.
