Here’s an interesting thought exercise: imagine if upwards of 70% of all newly constructed housing, both single- and multi-family, comprising the entire stock of federally backed mortgages for new homes in any given year, were now required to be built to the latest model energy codes.

A portion of that estimated 70% already reflects that reality, in the form of new federal housing developed by HUD and the USDA, and soon the Department of Veterans Affairs (VA), which as of last May have adopted the latest codes—ASHRAE Standard 90.1-2019 and the 2021 IECC—for all new homes. And now, the Federal Housing Finance Agency (FHFA), the conservator and regulator of Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) that buy and guarantee nearly half of all mortgage loans, is considering similar action. Should it come to pass, soon more than two-thirds of every new home built in the U.S. will be energy efficient by law.

Affordable housing and energy efficiency

At the urging of the Campaign for Lower Home Energy Costs, a coalition of organizations that includes U.S. Green Building Council (USGBC), the American Council for an Energy-Efficient Economy (ACEEE), and RMI, among others, the FHFA and the agency’s director Sandra Thompson have been reminded of the life-cycle cost savings for homes designed with better energy codes, plus the “energy burden” that many underserved communities contend with.

In a May 29 letter addressed to Thompson, a larger contingency of affordable housing, consumer, health, energy efficiency, environmental advocacy, and related organizations and businesses wrote that “with the adoption of minimum energy requirements, low- and moderate-income households will not be saddled with decades of energy waste, high utility bills, and poor resilience, and will instead have healthier homes they can afford to live in long-term.” (Thompson previously stated at a congressional hearing that she expects FHFA to issue a decision by the end of Q2 2024, which has now passed.)

It is worth noting that unlike HUD and USDA, which are legally required to “adopt periodic revisions” to ASHRAE 90.1 and the IECC, per the Energy Independence and Security Act (2007), this would be new ground for the GSEs (aka the Enterprises), which historically have not implemented minimum energy efficiency requirements. Fannie and Freddie are not federal agencies, so any incentives for these enterprises to require all new homes with federally backed mortgages be built to model efficiency standards would have to be structured differently. In other words, having things like Energy Star certification or the DOE’s Zero Energy Ready Home (ZERH) certification attached to loan applications will need proven bankability.

In that regard, the FHFA is evidently considering a greater diversity of prescriptive pathways to energy efficiency, according to Erin Sherman, a senior associate with RMI. FHFA’s thinking isn’t all or nothing, but there is “a very real interest in aligning the market” and “accelerating the learning curve,” Sherman says. “Given the scale of how they operate, and their relationships with builders and lenders, part of the appeal of [Energy Star and ZERH] certifications is that you generate a HERS score, and having a score you can attach to your loan application and to the performance of that loan over time is good for rating assets, automating underwriting, and things that are important to [Fannie and Freddie] but less so for HUD or USDA.”

“There’s a lot of cross-compatibility there,” Sherman continues, referencing the latest energy codes and relevant certifications. “If, say, someone in a jurisdiction without a code gets an Energy Star certification, it’s just an alternative route to eligibility that is already scaled up.”

The key benefits of implementing home energy standards cited in the Campaign’s letter to Thompson include less financial risk for the GSEs, improved household resilience, and savings for residents. That last one actually gets top billing, which doesn’t feel like a coincidence. The issues of savings and costs as they relate to regulating energy codes have become major sticking points in recent years, highlighted notably by the National Association of Home Builders’ (NAHB) repeated claims that building codes mandates are bad for business.

The conservative approach

In a different letter addressed to Sandra Thompson, dated May 20, a coalition of real estate associations that includes the NAHB, the National Multifamily Housing Council (NMHC), and the Institute of Real Estate Management, among others, is urging FHFA to stay the course, so to speak. This group believes that requiring the 2021 IECC and Standard 90.1-2019 for new homes that secure GSE mortgages would wildly disrupt the home market, inconvenience homebuilders, and alienate potential homeowners.

Under a section unambiguously titled “Building Codes Are a Significant Driver of Regulatory Burdens and Costs in Housing,” this group’s letter cites a “just-published survey by NMHC” in which 66% of respondents “agreed or strongly agreed that compliance with energy performance and efficiency requirements caused significant challenges for their business” and 63% had similar thoughts regarding home electrification and “net-zero emissions-related provisions.”

Of note, in the same survey 51% indicated they felt “challenged” by meeting accessibility requirements, and 49% feel that structural codes cause “significant compliance challenges.” Reading between the lines here, it seems like a lot of respondents in this survey feel generally burdened by the prospect of doing their jobs.

To be fair, the NAHB and its peers in this contrarian effort are not advocating for total inaction. They are advocating for caution and steady resolve, which in the context of the current housing crisis can seem either shrewd or myopic, depending on how you take your coffee. But the letter does highlight some legitimate gray areas within the debate, and makes some fair points along the way:

“New construction in a 2009 IECC jurisdiction attempting to use an Enterprise for permanent financing would face tremendous challenges in catapulting over a decade of code updates to comply with the newest energy code,” reads one passage. In another, towards the end, the letter pivots by mentioning that “the Enterprises hold over $1 trillion of multifamily debt that contains many older properties that hold the potential for FHFA to achieve a goal of increasing energy efficiency and sustainability for the industry.”

Perhaps their letter should have led with that last point, rather than leaving it to the bitter end. It might make it easier to be more sympathetic to this group’s cause. Yes, existing housing stock can and must be retrofitted to perform better and consume less. Further, should any percentage of that stock become the purview of FHFA in due time, excellent, but advocating for that versus the other thing isn’t their real concern.

On the issue of savings

According to the ACEEE, “residents of energy efficient homes are less likely to default on their mortgage payments.” The organization supports this claim with supplemental data, from HUD and USDA, concerning upfront costs (many of which can be incorporated into a mortgage) and annual mortgage increases relative to annual energy savings in an energy efficient home.

The big picture: the ACEEE and its peers estimate that the average family will save over $15,000 in energy costs over a 30-year mortgage. (The NAHB has countered with its own consumer report, from 2021, claiming that any such savings are drastically offset by the upfront costs of building homes up to the highest model codes.)

“Claims of high expense are simply overstated by undereducated builders,” says Sam Friesen, a homebuilder and sustainable building consultant based in Grand Rapids, MN, in a recent LinkedIn post.

In a conversation with GBA, Friesen expressed support, at least in some instances, for going beyond the 2021 IECC. “There’s an irony in that, building modestly better than we are now is modestly more expensive,” he says. “But building substantially better is actually starting to become cheaper because the cost of HVAC is these houses has gotten so expensive. It’s cheaper to invest in insulation, air-sealing, and good windows … than it is to put in HVAC systems to accommodate the building loads [of energy-inefficient buildings].”

Updated energy codes don’t worry Friesen. What he does find concerning is a changing climate and the extreme weather events that this has wrought. He mentions that over the course of his career, he has “lost tens of thousands of dollars to damage on job-sites from extreme rain events,” including a recent heavy rainfall event that impacted northeastern Minnesota and cost him “about $3,000” on a garage project.

Friesen’s thinking is clearly aligned with that of RMI, the ACEEE and others, who know that efficient homes are both climate-resilient and less mired in financial risk. Add to which, having federally supported mortgage financing for high-performance homes would be a significant market driver.

“I think there’s been a lack of interest across the industry to learn more about efficient systems,” Friesen says. “I’m certainly sympathetic to the challenges of retaining skilled carpenters and getting houses built; that is the most challenging part to running a business right now. But the actual requirements on the energy code side, I don’t see that as a big challenge.”

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