16 February 2022

$100 billion of impact: inside Fannie Mae's green bond programme

Fannie Mae has issued more than $100 billion in green bonds backed by mortgage loans that deliver environmental and social impact to the US housing market. Laurel Davis and Lisa Bozzelli talk to Environmental Finance about Fannie Mae's green bond programme and how it fits into the firm's broader corporate ESG strategy.

Environmental Finance: Over the past 10 years, Fannie Mae has become the world's largest issuer of green bonds. However, readers outside of the US may be unfamiliar with the company. Can you briefly describe what Fannie Mae was created to do?

Laurel DavisLaurel Davis: Fannie Mae is a purpose-driven company, originally chartered by the US Congress to deliver liquidity, affordability and stability to the US residential mortgage market. Our role is to facilitate the flow of global capital into the housing market by issuing guaranteed mortgage-backed securities. Our guarantee to investors of timely payment of principal and interest helps lenders offer affordable mortgage loans, like the 30-year, fixed-rate mortgage, to low- and moderate-income homebuyers, and the 10-year, call- protected fixed-rate loan to multifamily borrowers to promote access to affordable, quality rental housing. Through the first nine months of 2021, we provided $1.1 trillion in liquidity to the market.

Part of this liquidity is raised from the green bond market

Specifically, we issue Multifamily Green Mortgage-Backed Securities [MBS], secured by one green mortgage loan collateralised by one property, Green Guaranteed Multifamily Structures [Fannie Mae GeMS], a resecuritised pool of Multifamily Green MBS and, since 2020, Single-Family Green MBS, pools of single-family mortgage loans backed by newly constructed single-family homes that are certified to independent rigorous energy requirements.

EF: Your green bond programme is a component of Fannie Mae's broader ESG strategy. How does your ESG strategy build on your mission?

LD: Sustainable and affordable housing is the foundation of economic well-being for individuals and families. Our mission is to facilitate equitable and sustainable access to homeownership and quality, affordable rental housing across America. That mission directly drives our ESG strategy, which is focused on how we can create even greater positive environmental and social impact through the core elements of our business.

The environmental elements of our ESG strategy focus on climate risk, climate resilience and energy efficiency, the latter of which is reflected in the core of our green bond programme. The social elements include a focus on affordable housing, on promoting housing stability for both homeowners and renters, and making the housing system more equitable. Our mission also informs how we think about governance, and we place a particular focus on strong risk management to maintain safety and soundness so that we can support the borrowers and renters who are the ultimate beneficiaries of the liquidity we facilitate in the markets.

We formulate our ESG strategy through input from key stakeholders and we pay close attention to global market standards; for example, we published our Sustainable Bond Framework, which was independently assessed as aligning to the ICMA [International Capital Markets Association] Green Bond and Social Bond principles.

EF: Given your mission, what actions is Fannie Mae taking as it relates to social objectives in US housing?

LD: A primary social focus for us is leveraging our unique position in the US housing ecosystem to make housing finance more equitable overall, with a particular focus on groups that have been underserved in the past. We've taken a data-driven approach to tackle the obstacles that have been contributing to the 30-point gap in homeownership rates between Black and White households. For example, one of the biggest obstacles to qualify for a mortgage loan is insufficient credit history.

Last year, we made a groundbreaking update to our automated mortgage underwriting system allowing lenders for the first time to consider positive recurring rent payment history when assessing a borrower's eligibility for a mortgage. This update expands eligibility for homeownership to qualified renters who may have limited credit history, but a strong history of on-time rent payments. In addition, we continue to work to understand and minimise racial bias in the home appraisal process by leveraging our database of roughly 54 million appraisals to support research and analysis.

We're also addressing housing inequity and the homeownership gap by expanding access to reliable knowledge of housing and housing finance through our free online homeownership education course, HomeView.

EF: Delivering transparency to investors and other industry stakeholders is increasingly important. Could you speak to the expanded ESG reporting and disclosures Fannie Mae has provided in recent years?

LD: Increasing transparency around our ESG efforts is a high priority. We added a new section on ESG matters to our 2020 Form-10K report, and in 2021 we published our first SASB [Sustainability Accounting Standards Board] report. We also undertook updates to our website to make our ESG information more accessible. As we look ahead, we'll continue to expand the scope of our voluntary disclosures while aligning to global frameworks and standards.

LisaBozzelli: On the securities side, we leverage multiple platforms including Single-Family and Multifamily MBS disclosure websites to communicate green and social-related data. In addition, investors can access the estimated projected environmental impact per green bond in a downloadable Excel format on our Green Bonds webpage. We also partner with data providers, like Bloomberg, to display green bond flags to enable investors to quickly determine if a bond aligns with our Green Bond Frameworks.

We've expanded transparency through our social disclosures as well. For example, we added additional area- median income [AMI] data fields for Multifamily MBS to give investors a better idea of what type of affordable housing their investment supports, and for Single-Family MBS, we introduced Special Eligibility Program disclosures to identify loans financed through one of our affordable lending programmes.

The journey to $100 billion in Fannie Mae multifamily Green Bonds

Source: Fannie Mae Multifamily issuance data through November 30, 2021

EF: In the green, social and sustainable bond market, the securitised products sector lags corporate and sovereign issuance. Why do you think this market has been slower to develop?

Lisa BozzelliLB: The green bond market started in Europe post financial crisis in a regulatory climate that favoured corporate and Supra issuances or issuer-linked securitisations, like covered bonds, over asset-backed securitisations. In addition, the nature of a securitisation model requires the accumulation of several smaller financial instruments to make the larger tradeable security. For a green bond programme like ours, for example, that means that we must work with a large number of apartment building owners and single-family builders and lenders to develop green homes that meet our criteria, which takes time. The asset-backed securitisation [ABS] execution, however, does provide diverse investment opportunities for the green and social investor with its ability to tranche by maturity and credit characteristics. It also typically allows for a cheaper cost of capital for individual borrowers and enables lenders to recycle their capital back into the market. Although it may have had a late start, the ABS market in the US and in Europe is finding its place in the green, social and sustainable bond market.

EF: Meanwhile, Fannie Mae has issued over $100 billion in green bonds over the past decade. How has investor reception evolved?

LB: In the early days, there was not a lot of interest among our traditional investors in exploring green or social bonds specifically. We were able to attract investors who were new to Fannie Mae multifamily securities, but who were looking for investment opportunities that met their sustainable frameworks. Over the last two years, awareness of US investors in both green and social investments has grown exponentially. Our traditional investors are in various stages of developing their own ESG programmes and frameworks determining what they want from sustainable securities. It's become a much more dynamic discussion as investors are thinking about ESG in the context of their overall risk analysis as well as impact.

EF: What about pricing? Are you seeing investors prepared to pay a premium to hold Fannie Mae green and social bonds?

LB:There are many factors that go into the pricing of an MBS beyond the green or social nature of the investment. Isolating a premium is complicated because each MBS is backed by one or multiple loans on one or multiple properties. Anything from the term of the loan to the location and property type will influence the pricing. Whether the MBS provides green or social impact is just one of several defining characteristics. In multifamily, when we pool individual MBS into a larger diversified resecuritisation, we see strong participation from ESG-designated investors who tend to be a little 'stickier' so, as deal spreads tighten, these investors are less likely to drop their orders.

EF: You began issuing Multifamily Social Bonds in January 2021. Can you tell us more about this offering and how it fits into your corporate social objectives?

LB: As Laurel mentioned earlier, we're working to expand access to affordable homeownership and rental housing.While Fannie Mae has long issued MBS that support affordable housing, through our multifamily social bond programme we offer bonds that align with our Sustainable Bond Framework, which demonstrates our commitment to global social bond principles. Through the end of 2021, we issued $11.4 billion in multifamily social bonds. These bonds include loans on restricted affordable housing properties, which are properties with a regulatory agreement requiring certain rent and income restrictions for tenants. Our multifamily social bonds also include manufactured housing communities, which address the need for housing of low- and moderate-income families.

As property affordability data become more available, investors will be able to target their support to these types of properties that may meet their social investment criteria.

EF: What are some of the challenges and opportunities for Fannie Mae as it continues its ESG journey?

LB: Getting transparent, homogenous data to the market is a key focus for us, but it does not come without challenges.

On the single-family side, we need to be mindful that releasing certain types of geographic data or borrower characteristic data requested by investors may increase the risk of compromising an underlying borrower's privacy. On the multifamily green finance side, the lack of raw building data from utility companies makes it very difficult to compare building energy performance or to demonstrate post-renovation improvements. We continue to explore opportunities to increase the impact of our programme. For example, our single-family green business is exploring opportunities in the retrofit market, which presents its own unique challenges related to data collection.

LD: In terms of our broader ESG strategy, we recognise that the size and scale of the issues we are trying to address means that these aren't problems we can solve on our own. For example, when we talk about creating more climate-resilient housing stock, it will take initiatives across the government and the housing industry to address the transition risk involved, and what to do about the borrowers and renters in those impacted communities. Likewise, our work on racial equity will require partnerships to address some of the most persistent barriers to homeownership.

However, on the opportunity side, we can use our unique position in the US housing market and our convening power to help drive greater outcomes in this space. One example is our Future Housing Leaders Program, which we developed a few years ago to help create a pipeline of diverse talent for the housing industry. By working with companies across the industry, it places candidates in internships and early career opportunities that help the industry's workforce better represent the population that it serves. Our capacity to do well as a company is tied to our work to drive positive outcomes for families and communities and we look forward to continuing our ESG journey.

Laurel Davis is head of ESG, and Lisa Bozzelli is senior director, multifamily capital markets, at Fannie Mae in Washington, D.C.

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