Driving impact in housing affordability and environmental sustainability

After issuing $87.5 billion in mortgage-backed securities (MBS) in the green bond market with its multifamily residential financing products, Fannie Mae has expanded its efforts into multifamily social MBS and single-family residential green MBS.

Environmental Finance spoke with Chrissa Pagitsas and Lisa Bozzelli to hear how the company worked together to increase the positive impact of Fannie Mae's sustainable products and to pass savings on to tenants and homeowners.

Environmental Finance: Fannie Mae has a long-standing history in US housing. How does your environmental, social and governance (ESG) strategy fit into your firm's objectives and integrate within the organisation?

Chrissa PagitsasChrissa Pagitsas, head of ESG, Fannie Mae: ESG is a natural fit with, and strengthens, Fannie Mae's mission to provide liquidity and promote stability and affordability in the US single-family and multifamily residential mortgage market. Our ESG strategy builds on our existing mission activities to deliver additional positive environmental and social outcomes in US housing.

To ensure ESG is incorporated into our enterprise, we integrated ESG oversight, strategy and implementation at multiple points within our organisation. Fannie Mae has committed to ESG as an enterprise strategic objective in our Form 10-K. Our ESG strategy is governed and implemented by our Community Responsibility and Sustainability Committee of our Board of Directors as well as our dedicated ESG team.

EF: You entered the ESG bond market with your Multifamily Green Bond program in 2012 and have been the world's largest issuer of green bonds since 2017. How has that program evolved?

CP: We strongly believe that innovating and testing products is the best way to meet growing investor needs and evolving global standards. Over time we have refined our product offerings while keeping our strategy focused on delivering financial, social and environmental impacts, or "triple bottom line impact." As a result of feedback from our lenders and investors, our offerings evolved into the two current offerings: our Green Building Certification (GBC) program and our energy and water consumption reduction program, Green Rewards.

As we grew green financing volume, we calibrated the eligibility requirements to help deliver more cost reductions to the residential tenants within the property and to the property owner through efficient use of capital and an increased focus on positive environmental impact. We have required minimum energy consumption reductions, which drive greater savings to the tenants who often pay for their own electricity.

Over the past ten years, we have also seen growth in the number and type of GBCs in the market with increasingly stringent and higher environmental standards. Each year we assess the new existing certifications and select those that meet our environmental standards for inclusion in our program. Just last year we celebrated a first for the mortgage and green bonds industry – a securitised mortgage backed by a property meeting passive house standards. What does this mean? The green bond collateral was a multifamily property successfully designed and built to meet standards for properties striving for net-zero energy use through use of highly efficient construction, deep energy efficiency features and renewable energy generation (see box).

Pax Futura

In 2020, Fannie Mae provided $5.9 million in financing for its first property with a PHIUS+ green building certification for properties striving for net-zero energy use. Pax Futura, a newly constructed 36-unit apartment building in Seattle, Washington, combines highly efficient construction, deep energy efficiency features and renewable energy generation. With micro units comprising half of the apartments, its resource conservation, solar thermal hot water system and durable construction are projected to reduce energy consumption and costs by at least 70% compared to a similar multifamily building built to code.

 

Lisa BozzelliLisa Bozzelli, senior director, multifamily capital markets, Fannie Mae: As we've built our program, we continue to invest in our disclosure systems, leading the residential mortgage market in transparency. We publicly disclose the projected environmental impact of the multifamily green bonds in our portfolio at the individual bond level, both at issuance and on an ongoing basis. We've disclosed new fields such as the US Environmental Protection Act (EPA) Water Score, and Electricity Generated (kBtu).

Investors have responded positively to our green bonds; in the past two years, we have seen a noticeable increase in the number of our investors who either have a dedicated green fund or an ESG mandate for their portfolios. We're excited to see continued interest in our green bonds and the overall desire in the market for more impactful investing.

EF: You began issuing Single-Family Green MBS in April 2020. What do you hope to achieve by adding that program to your green bond suite?

LB: In a word: impact. We believe every loan can be a green loan. We're proud of the $87.5 billion in Multifamily Green MBS we've issued. Now it's time to expand the program to our single-family business. The single-family residential mortgage market is about seven times bigger than the multifamily market, with Fannie Mae accounting for roughly 30% of that market as of September 2020.

Expanding our established green financing business into the single-family market allows us to take a new approach to improve environmental sustainability in the homes we finance. Our Single-Family Green MBS program is the next step in our ongoing effort to promote and expand the growth of an active green bond market.

EF: You began issuing Single-Family Green MBS in April 2020. What do you hope to achieve by adding that program to your green bond suite?

LB: In a word: impact. We believe every loan can be a green loan. We're proud of the $87.5 billion in Multifamily Green MBS we've issued. Now it's time to expand the program to our single-family business. The single-family residential mortgage market is about seven times bigger than the multifamily market, with Fannie Mae accounting for roughly 30% of that market as of September 2020.

Expanding our established green financing business into the single-family market allows us to take a new approach to improve environmental sustainability in the homes we finance. Our Single-Family Green MBS program is the next step in our ongoing effort to promote and expand the growth of an active green bond market.

Unlike multifamily properties where energy and water savings are often divided between the property owner and the multiple residential tenants, our Single-Family Green Financing business provides an opportunity for the homeowner to benefit directly by choosing to purchase an ENERGY STAR-rated home. With our programmatic approach in 2020, we issued over $100 million in bonds in just ten months.

LB: For readers unfamiliar with Fannie Mae's single-family residential securities, one important differentiator between the Multifamily MBS and the Single-Family MBS is the number of loans and properties backing the security. Our Multifamily MBS are generally backed by one loan on one multifamily property or an apartment building. For single-family, each MBS is backed by multiple loans backed by individual single-family homes.

In the multifamily green world, this possible diversity of properties is found in the re-securitised Real Estate Mortgage Investment Conduit (REMIC) structures which we issue a few times each year. We have issued $11 billion of the green Fannie Mae Guaranteed Multifamily Structures (Fannie Mae GeMS™) structures as of the end of 2020. It is also important to mention that both multifamily and single-family MBS are guaranteed by Fannie Mae for the timely payment of principal and interest on the bonds.

EF: In early 2021, Fannie Mae published its sustainable bond framework. What does this mean for the company?

LB: Our sustainable bond framework builds on our existing business. The new framework acts as an umbrella, enabling us to issue social bonds, green bonds and a combination of the two. The framework was reviewed by Sustainalytics and is aligned with ICMA's Green Bond Principles (GBP) and Social Bond Principles (SBP). As a result, we issued our first Multifamily Social GeMS this January, a $315 million REMIC offering backed by 26 affordable housing or manufactured housing community properties. We will continue to work to grow the number of affordable units we finance without sacrificing bond performance.

CP: Both our Single-Family and Multifamily Green Financing businesses are a key part of our sustainable bond framework. We believe we are on the leading edge of growth in these markets and can establish market standards for the housing sector. As such, we chose to maintain the rigor of our green financing businesses within the sustainable bond framework. In order to maintain a strict expectation of environmental impact, a Fannie Mae Sustainable MBS must be an affordable property that also complies with our green bond frameworks.

EF: Given the hardships many homeowners and renters are facing due to the Covid-19 pandemic, what actions is Fannie Mae taking to help support America's housing market?

CP: Our social mission has been put to the test given the pandemic. One of the most effective tools to provide rapid relief to borrowers was ensuring that all borrowers impacted by Covid-19 are provided an opportunity for a temporary suspension or reduction of the monthly mortgage payment through payment forbearance.

As of the end of September, we have helped lenders to initiate forbearance plans for more than 1.2 million Fannie Mae borrowers in 2020. We designed simplified paths out of forbearance that are catered to the varying circumstances the impacted borrower may be experiencing. We also temporarily suspended most foreclosures and evictions. The goal is to help borrowers find a long-term solution that meets their needs once the Covid-related hardship is resolved.

Fannie Mae also has been reaching homeowners and renters through our Here to Help campaign, a multi-channel campaign to educate borrowers and renters on their options and provide them with tools to navigate a Covid-19-related hardship.

LB: From a market perspective, we have supported the stability and liquidity of the mortgage market through the crisis with clear and frequent communications with investors. We have worked hard to speed the information from borrower to servicer to Fannie Mae disclosure systems. We have invested in technology improvements and have adapted existing technology to increase our efficiency in this time of crisis. These efforts have enabled millions of homeowners to refinance and save money in this time of need.

EF: As Fannie Mae continues its ESG journey, what can we expect next?

LB: We are excited about the progress we have made in creating impact in US housing, but there is always more work to be done with partners and market stakeholders to determine best practices, develop common standards and work together to increase impact. Unfortunately, the economy may be working its way through the negative impacts of the pandemic for several years.

The inability of families and individuals to pay their rent or make their mortgage payments is top of mind and has exacerbated an already challenging affordable housing crisis in the United States. It is our intention to continue to find creative and impactful ways to address these challenges while continuing to support the liquidity of the mortgage market.

CP: From a corporate perspective, we're continuing to drill down on our ESG strategy, focusing on where we can truly make a difference in US housing, and continuing to examine ways to measure that impact, grounded in our commitment to transparency. Continuing to lead the way with standards for green bonds and now social bonds will be top priorities. We're more excited than ever to continue to help lead the mortgage market to a more sustainable future.

Contact: Lisa Bozzelli
Email: lisa_m_bozzelli@fanniemae.com