As more financial institutions incorporate green lending products into their lending portfolios, the benefits of these loans, both to borrowers and the environment, are beginning to come into focus. LoanStreet, a premier loan participation and syndication platform, recently hosted a webinar to discuss the benefits of green lending with subject matter experts in the space. The resulting discussion was extremely insightful, and expounds upon the benefits of green lending for FI’s looking to break into new avenues of lending. Below are some of our key takeaways from the discussion.
The Solar lending market is brimming with opportunity
Despite the pandemic and subsequent household economic troubles, residential solar energy installations grew 21% year-over-year in 2021 and is expected to surpass that in 2022. The consensus among our panelists was that this continued growth is largely driven by declining solar equipment costs, giving financial institutions more options for borrowers. Since 2010, the average price of a residential solar installation has dropped from over $40,000 to under $20,000. Even with recent supply chain price squeezes, solar equipment and installation labor costs are far below where they were a few years ago, making this technology more accessible to the average household. More affordable installations allow flexibility for lending institutions originating these loans, as solar equipment was historically quite expensive compared to the price of the home they were installed on.
As the solar market grows, these advancements are most notably concentrated in the states that have embraced this technology. The top 10 states for residential solar installations represent the vast majority of the total residential solar market in the U.S. However, as we see more states and municipalities adopt new green energy incentives, lending institutions will find new opportunities from borrowers looking to make the transition to solar..
Solar loans offer unique mutual benefits to borrower and lender alike
Financial incentives, such as tax credits, have been a driving force in the adoption of solar energy adoption. At a federal level, the 26% Solar Investment Tax Credit has been a major catalyst for the advancement of the industry, as the residential solar lending market has grown 10,000% since 2006. While the future of this credit is unknown, it created a long-lasting ripple effect by driving more states, local governments, and municipalities to adopt their own “go green” initiatives for homeowners.
With homeowners being financially incentivized to incorporate solar technology into their homes, more individuals are also taking advantage of the cash flow opportunities offered to them after their installation is complete. Energy savings from solar panels can offset more than 90% of electric utility costs yearly, resulting in the greatest marginal benefit of any home improvement project a homeowner can undertake.
In addition, the enhanced creditworthiness of borrowers provides strong yields and low risk for financial institutions offering the product. Generally, applicants are already homeowners, with strong FICOs , low LTVs, and low DTIs. One example of this borrower profile comes from Clean Energy Credit Union, a federally chartered credit union that has originated over $100mm of residential solar loans without any delinquencies or charge-offs to date.
Resources and partnerships make solar lending simple and safe
As we heard from our panelists, there are a number of ways financial institutions can incorporate residential solar loans into their portfolio without adding undue risk. For FIs looking to fully incorporate a solar loan origination process, there are online resources such as Inclusiv's Solar Lending Professional Training & Certificate, offering community-based lenders free training on designing and implementing such a program. Additionally, partnering with an institution who specializes in originating solar loans, such as another of our panelists, PowerPay, can create the opportunity to originate at scale without significantly redistributing your existing processes.
For institutions looking to test the waters on this asset class, purchasing participations, as we heard from Tremont Credit Union, is a viable option. They noted the social and financial benefits to borrowers and the state of Massachusetts' widespread incentivization for residential solar, as primary factors in their decision to purchase these loans. The results? $3MM of purchased loan participations with no charge-offs or delinquencies to-date.
In addition to these resources, LoanStreet’s platform offers many tools to incorporate residential solar loans into your portfolio without additional administrative burden. From identifying and purchasing these loans on our marketplace to our monthly automated reporting processes, we're ready to help you benefit from this growing market today.