22 February 2019

Bringing billions and housing to the green bond market

Fannie Mae's Green Financing programme is tapping the global capital markets to reduce energy and water bills for thousands of multifamily owners and tenants in housing, making the US housing finance giant the world's largest green bond issuer along the way

Mae has been the world’s largest issuer of green bonds: what was the genesis of your Green MBS programme? Chrissa Pagitsas, Vice President, Enterprise Environmental, Social, Governance: We frequently get asked how we achieved this ‘overnight success’ of becoming the world’s largest green bonds issuer. However, we have had a long commitment to green financing and green bonds. We launched this programme for the multifamily market in 2010 and issued our first Multifamily Green MBS in 2012. Our $50 billionplus Multifamily Green Bond portfolio today represents the maturation of our programme.

Fannie Mae’s mission is to support the US mortgage market by providing stability and increased liquidity and to help underserved markets – such as affordable housing for low- and moderate-income families. Although we cannot directly build more affordable housing in the United States, we have the ability to make housing more affordable for tenants; we see energy and water efficiency contributing greatly to that outcome.

Here in the US, utility costs outpace inflation, rising by more than 50% over the past decade according to The Harvard Joint Center for Housing Studies. Green Financing and Green Bonds positively impact tenants’ quality of life by making existing housing stock healthier and more affordable. Thinking about this impact from the pocket book, a study by Energy Efficiency for All found that low-income households spend a median of 7.2% of their total income on energy bills annually, more than twice what the median household spends.1 Fannie Mae sees that finding innovative ways to support affordability in housing through energy and water efficiency while also developing a strong security in the market fulfils our mission.

EF: Clearly, it took a few years for the programme to reach critical mass. What were the challenges you faced in bringing it to scale?

CP: Key to the programme’s success lay with our ability to communicate to our lenders the value of the product for their to their customers, multifamily borrowers. We often underestimate in the financial services industry the degree to which people need to be influenced and helped to understand the value in ‘green’. Our multifamily business operates through a delegated business model, using our lender partners as our sales force to reach individual apartment owners. We needed to communicate to our lenders why green financing is good, and why it benefits their borrowers. We had to help them understand the eligibility criteria, the programme requirements, and the financial and environmental impact and how they could communicate this information to their borrowers.

The Fannie Mae Multifamily Green Bond Framework

Fannie Mae provides liquidity to the US mortgage market, purchasing and guaranteeing mortgage loans made by lenders to single-family and multifamily properties. In 2010, it launched its Multifamily Green Financing Business, which offers advantageous lending terms to owners of multifamily rental properties who commit to target reductions in energy and water consumption. Since 2012, Fannie Mae has tapped the green bond market by issuing green mortgage-backed securities (MBS), becoming the world’s largest green bond issuer in 2017 and 2018, issuing a total of more than $50 billion in green MBS by the end of 2018. 

This volume is about technical innovation – around credit risk and green bond issuance – but it’s also about human change management and transformation. I can’t stress that enough: if a lender doesn’t understand the value of green financing, we won’t see a loan. Key to that, in addition to describing the benefits, was keeping it simple: so a lender could talk about energy consumption in 30 seconds or less. We also had to innovate new processes in the energy underwriting world – streamlining the energy audit turnaround time from two months to two weeks – in order to meet the tight timeline requirements of the commercial mortgage world.

EF: How were you able to make the product sufficiently attractive to achieve $50 billion of issuance?

CP: When something is new, you have to create an incentive to make it stand out. We offer a slightly lower all-in interest rate on green loans than borrowers can get for a non-green loan by reducing our portion of the capital stack. But that’s not the only incentive: we also created industry-changing underwriting to allow for additional loan proceeds – so a bigger loan – by underwriting projected energy and water savings from the tenants’ bills as well as the owner’s, as well as paying the entire cost of a Level II ASHRAE-standard energy audit. We are focused on creating value for owners beyond the interest rate.

To qualify for a Green Rewards loan and all its benefits, the owner has to make capital improvements that are projected to reduce the property’s energy or water consumption by 30%, and 15% of that reduction must be in energy consumption. This is a meaningful reduction for properties in the US, and that reduction impacts more than just the owner’s bottom line.

We would like owners to do more than improve the energy and water efficiency of their buildings’ common areas: we want them to make investments in the refrigerators, in the lighting, heating and ventilation systems in the residential units. We find ways to encourage the owners to not only think about increasing their cash flows, but also reducing their tenants’ expenses. By aligning borrowers’ incentives with ours and the tenants’, Fannie Mae’s Green Financing Business is better able to fulfil Fannie Mae’s mission to support affordable housing in the United States.

Crucially, we tie additional lending to tenants’ savings: if tenants are projected to save $100 on their bills, we allow the lender to underwrite $25 of that, so the owner can take a larger loan. We’ve made incentives material to the owner, but they also benefit the tenant: we look at the building holistically. No other mortgage product in the world that I’ve seen offers this underwriting.

EF: Given that it is the tenant, not the property owner, that sees that savings on their bills, doesn’t that risk breaking the link between the mortgage holder’s cashflows and the size of the loan?

CP: That $25 will not show up directly on the owner’s cashflow; it’s the tenant’s utility bill, but we’re giving the owner credit in its net operating income for the tenant’s projected savings. It’s ground breaking, but it needs to be put in context. The influence of that underwriting may move the loan size by very little, by approximately 1-2%. There are many other assumptions that underwriters make – such as about projected rents, occupancy rates etc. – that move the needle more than that. Rather than looking at this innovation in isolation, as something new and therefore risky, we need to think about it in relation to other technical levers that can also influence loan proceeds.

EF: Issuance was down somewhat between 2017, when you sold almost $28 billion of green MBSs, and 2018, when the figure fell to $20 billion. What was the reason for the fall?

Chrissa Pagitsas, Vice President Enterprise Environmental, Social, Governance, Fannie MaeCP: If there’s a highly competitive mortgage market, the spread between a green loan and a non-green loan tightens, and we may not win as many green loans. Last year was a highly competitive market. We still issued $65 billion of multifamily MBS, which was a great number, and we are proud that we could capture 30% of that business for green.

In addition to that $20 billion of MBS issuance, however, we also issued $2.7 billion in Green GeMSTM (Guaranteed Multifamily Structures) in 2018. GeMS are a re-securitization of a pool of DUS® MBS into a Real Estate Mortgage Investment Conduit (REMIC) structured product. Some investors prefer our single pool MBS, and others prefer our GeMS, which allow for investors to have a larger, more geographically diverse group of MBS collateral as the base of their investment. The product also allows for time tranching and stripping of an interest-only class in order to try to provide different green investment options for different socially responsible investor demands. To date, our capital markets department has issued over $7 billion in Green GeMS. These securities serve a dual purpose of also attracting new investors to our DUS and GeMS products, creating more liquidity for the US housing finance market.

EF: Clearly, there’s been no shortage of investor demand for Fannie Mae’s Green MBSs – but what questions do new buyers have about the bonds?

CP: When I’m on the road meeting with investors globally, the two most common questions I receive are: what makes our green bonds “green”? And, how does Fannie Mae operate and issue MBS? On the first one, I share our long-term commitment to Green Financing, and our strict requirements to ensure that Green Mortgage Loans are indeed targeting high levels of energy and water consumption reduction. I talk about our lenders’ use of escrow accounts to manage the use of proceeds for energy and water efficiency capital improvements and our commitment to reporting. Last but not least, I highlight our CICERO Second Opinion, which is a powerful external validation of our programme.

On our business model and issuances, Fannie Mae supports the liquidity and stability of the US mortgage market, primarily through purchasing and securitising mortgage loans originated by lenders into MBS, which we then guarantee. We operate in the secondary mortgage market in two business lines, Single- Family and Multifamily. Fannie Mae is a government-sponsored enterprise, chartered by the US Congress in 1938 to support America’s housing market. Since September 6, 2008, Fannie Mae has operated under the conservatorship of the Federal Housing Finance Agency and has subsequently entered into an agreement with the US Treasury that permits us to continue to fulfil our mission.

There’s no lack of capacity in the market for our green bonds, but I recognise the need to continually educate the market, particularly around the stability of an MBS product.

EF: In its second opinion on the Multifamily Green Bond Framework, Cicero rated it as ‘Light Green’, describing the solutions it supports as a “necessary and important first step in a low-carbon … transition”. Do you agree with that assessment?

CP: CICERO recognises the need for this type of transitional green bond product. We can’t solve the climate problem through new-build alone; there isn’t enough capital to replace every piece of real estate globally with super-green properties. And, even with low-waste construction techniques, there is still environmental impact from building new. We have to retrofit existing, aging real estate to achieve rapid, market transformation towards reducing greenhouse gases globally.

Let’s look at why this matters. Data analysed by our Multifamily Economics and Market Research team shows that, in 2019, there will be an estimated 453,000 multifamily units added to the US housing stock. This is 2% of the overall 20.8 million multifamily units that are estimated to already be in the market.2 Unfortunately, market data is not available on how many of these new units will be built to green building certification standards, like Passive House or LEED, but let’s make a generous assumption that 10% or 45,300 of this year’s new multifamily units will be built to green standards. If that’s the case, then only 0.2% percent of the overall units will be green in 2019, and it will take 459 years for the existing stock to be replaced with green certified units.

Focusing on existing housing stock means that we can really impact greenhouse gas emissions. According to a Deutsche Bank study, in New York City, multifamily residential buildings account for approximately 35% of all greenhouse gas emissions. As a matter of perspective, that is equal to the emissions from all New York City office, retail, and industrial buildings combined, and more than 50% higher than emissions from all vehicles in New York City.3

Now let’s look at the opportunity to retrofit: in analysing over 2,000 Fannie Mae Green Mortgage loans, our data shows that multifamily properties can save 15% on energy consumption and an additional 15% on energy or water consumption at a reasonable median cost of $462 per unit. This cost is important because we should be cognisant that an owner has to be willing to spend the capital to make the property energy and water efficient. This capital consideration is important because property owners are always thinking about their returns on investment and what they will return to their equity holders.

Given the waste creation of the tear-down-rebuild strategy, and the overwhelming need to create more energy and water efficient multifamily properties, it is clear that the rehabilitation of existing buildings to meet energy and water consumption reduction targets has an important place in transitioning the global economy to a carbon-neutral environment.

Figure 1: Fannie Mae Green MBS and Green GeMS Issuances 2012-2018

EF: What’s next for your Green Financing programme, and Green MBS issuance from Fannie Mae?

CP: We’ve expanded our list of eligible Green Building Certifications this year to include additional green certificates recognized by international markets and with high energy and water saving targets, such as Passive House Institute and PHIUS. And we’re encouraging borrowers to consider installing solar panels on their multifamily property rooftops as an eligible green retrofit. Solar is complicated to place on existing properties, but we are here to support both our borrowers and lenders with deep knowledge of how to do it.

We are also attempting to address the demand side of the green bond equation, by engaging socially responsible investors who may not be familiar with US Agency collateralised MBS as a green investment asset. We are spreading the word about this high credit quality, dollar-denominated, Green Bond Principle-compliant, asset-backed security offering – Fannie Mae DUS MBS.


  1. Energy Efficiency for All, Lifting the High Energy Burden in America’s Largest Cities: How Energy
    Efficiency Can Improve Low Income and Underserved Communities, (2016)
  2. NMHC 2017 data, https://www.nmhc.org/research-insight/quick-facts-figures/quick-factsapartment-stock/.
  3. Deutsche Bank Americas Foundation, The Benefits of Energy Efficiency in Multifamily Affordable Housing (2016)
Green Bonds
Fannie Mae
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