Green mortgage push could raise brown collateral risk, warns Moody’s

Moody’s has warned that the development of energy efficient mortgages, and increasing momentum in the clean energy transition that this reflects, will hit the value of buildings that do not meet new minimum requirements, as well as securitisations and cover pools exposed to such collateral.

A European definition of an energy efficient mortgage developed by the Energy Efficient Mortgages (EEM) Initiative was released on Monday of last week (3 December), spurred by the need for such a concept in the pilot phase of the Energy Efficient Mortgages Action Plan (EeMAP) and broader EU moves targeting the transition to clean energy.

“Both the EEM Initiative and EU legislation support a long term strategy to renovate the EU-wide stock of residential and non-residential buildings, both public and private, into a highly energy efficient and decarbonised building stock by 2050,” Moody’s said this Monday.

“As the public/private momentum gathers pace, the value of buildings that do not meet minimum energy efficiency requirements will be negatively affected, gradually increasing the credit risk for structured finance transactions with non-compliant building collateral.”

The rating agency noted that residential and commercial mortgage-backed securities (RMBS and CMBS) and covered bond cover pools containing mortgages are directly exposed to the quality of the collateral underlying the mortgage loans.

“Where that collateral consists of properties that fail to meet prevailing standards, typically because energy performance is below an acceptable level, both the market and recovery value of the property will be negatively affected,” said Moody’s. “Investors and homebuyers will expect price discounts to compensate for the investment needed to make such properties energy efficient.

“Furthermore, the negative effects will likely worsen as energy efficiency regulation becomes more stringent over time and financing options such as the energy-efficient mortgage gain traction. Property upgrades for energy efficiency will additionally burden property owners because such upgrades will become increasingly necessary to meet legal requirements and market expectations.”

It noted that the Energy Performance in Buildings Directive and revised Energy Efficiency and Renewable Energy Directives are key EU legal measures coming into effect in the near future. While acknowledging that few regulations imposing limits on the energy a building can use have been enacted yet, Moody’s said stricter regulation and market pressure will make the financial costs for owners of non-compliant property more difficult to avoid.

Commercial property is more likely to be upgraded by owners than residential property, but also more likely to face penalties should this not occur, according to the rating agency, because upgrading will be more feasible for commercial owners, while residential owners are more likely to benefit from policymakers taking into account social considerations.

Having just returned from COP24 in Katowice, Luca Bertalot, EEM Initiative coordinator and EMF-ECBC secretary general, said Moody’s is correct about the direction of travel, but argued that the EEM Initiative aims to offer property owners a means whereby negative consequences can be mitigated.

“We started this initiative knowing that the legislative package that we see in the pipeline carries risks for citizens and our member banks,” he told Sustainabonds. “With this in mind, rather than increasing costs for non-compliant buildings, we are facilitating access to finance for those who want to improve the energy efficiency of their properties.”

Photo: Luca Bertalot speaking at a COP24 UK Pavilion event; Credit: The Carbon Trust/Twitter

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