GSEs green-lending programs expand rapidly

Six years ago, Fannie Mae started an experimental program that offered a discount on loans tied to so-called green apartment buildings that offer energy and water efficiencies. The program largely flew under the industry’s radar for the first few years. That all changed when Fannie’s competitor, Freddie Mac, rolled out its own program in the latter half of 2016.

Since then, the government-sponsored enterprises (GSEs) bankrolled an explosion in lending involving green apartment properties, collectively financing last year more than $46 billion in loans used to purchase or refinance green apartment buildings.

Fannie and Freddie both offer a discounted acquisition or refinance loan to multifamily owners that put in place energy and water-usage efficiencies, thereby incentivizing the owners to install solar panels and upgrade windows, faucets, lighting and so forth, when they buy the building a property or are refinancing an existing multifamily mortgage. Most of these loans are securitized for sale in the secondary market.

Fannie — which launched its program in 2012 — financed $27.6 billion in green loans last year, up from roughly $3.6 billion in 2016. Freddie bankrolled $19 billion, an increase from $3.3 billion in 2016.

Going mainstream

“It has really taken off the last 18 to 24 months,” said Andy Shires, managing director for Greystone. Shires said that a majority of the multifamily loans Greystone does with Fannie and Freddie now have an energy-efficiency upgrade component to them.

“It seems like it is more market-accepted, and people know about it in the marketplace,” he said.

Shires also expects the volumes to grow. Apartment buildings constructed before the year 2000 are usually good candidates for upgrades.

“We are just scratching the surface of what has been done to date,” Shires said. “People who are acquiring properties or even refinancing who haven’t done any of these type upgrades, it is a viable option because they can get pricing benefits, [and] they can get additional proceeds benefits,” Shires said. “From a tenant standpoint, they can reduce the tenant’s utility and water bill.”

The GSE regulator, the Federal Housing Finance Agency (FHFA), has given the GSEs a relatively free hand in expanding these programs. The green loans have generally been exempted from the GSEs federally mandated cap on lending in the apartment space. FHFA has been tightening its standards on what loans can be exempted, however. Fannie offers a discounted loan for properties that have been certified as green by a recognized third party, for example, and those loans are no longer eligible to be exempted from Fannie’s loan cap.

The GSEs can still finance an unlimited number of loans on buildings where the owners lower the energy and water usage by 25 percent, however. FHFA last year increased the required efficiency savings from 20 percent to 25 percent for a loan to be cap exempted. Fannie executives say the tightening standards should not significantly reduce the program’s lending volumes this year.

“From a mission perspective, the ability to renovate existing properties was much more in keeping with our mission, first because it helped to improve the existing portfolio of assets,” said Lisa Bozzelli, Fannie Mae’s director of capital markets and prices. “A large number of these green-building certified deals tended to be beautiful downtown towers that don’t necessarily meet our affordability criteria,” Bozzelli said. “Over the course of the year, FHFA basically excluded green-building certification, took it out from being cap-excluded, unless there was an affordable component, and have set a higher standard.”

For the green-loan discount, GSEs knock off an average of 20 basis points from their guarantee fees – which are charged to lenders for the GSEs’ guarantee of timely payment to the end investors in the loan. That fee reduction is passed down to the borrower as a rate decrease.

An owner has to complete extra steps to obtain the discount. With Fannie’s program, for example, the building undergoes an energy audit funded by Fannie to determine its deficiencies. The owners then can choose what energy-reducing projects they want to undertake and typically must complete them within one year. The borrower also has to annually report to the agency the building’s energy performance.

In conjunction with the green-lending program, Fannie has also been developing a market for a special type of green apartment bond.

The original loan is securitized into a single-property bond with Fannie’s guarantee of a timely payment and then auctioned to investors. Fannie Mae acquires a percentage of these securities through competitive bidding, and then resecuritizes them. Fannie recently began pooling green single-property mortgage-backed securities (MBS) into special tranches comprised entirely of MBS loans underpinned by green multifamily properties. These securities were recently included in Bloomberg Barclays MSCI Green Bond Index, which tracks securities that fund green projects.

Bozzelli said this latest development should make green bonds more appealing to global investors.

“The hope being that as the market matures and demand for those bonds increases, that the market will sustain that benefit, not Fannie Mae having to subsidize that,” Bozzelli said.

“There are still plenty of [energy] improvements [to the existing apartments] to be made,” Bozzelli said. “Our hope is that with the increased demand — as borrowers are smart about their finances, as they see a financial benefit, an economic benefit — hopefully that will draw more borrowers back to the well.”

Source: Scotsman Guide