Fannie Mae has emerged as a major player in the green bond market.
It issued a total of $31 billion of green bonds in 2017. Of these, $27.6 billion were mortgage-backed securities (MBS), backed by either green building-certified properties or properties for multifamily family homes, targeting a reduction in energy or water consumption.
The 'multifamily' mortgage-backed securities work by securitising one loan which has a single property as its collateral. The property must either have a sustainability certification, or be able to commit to improvements of at least 20% in either water or energy consumption. In return, the borrower receives an interest rate around 10 basis points lower than it would otherwise.
Fannie Mae requires owners receiving Green Financing to report the property's annual Energy Star score for tracking of energy performance over the life of the loan.
A further $3.4 billion of green paper came via its real estate mortgage investment conduits (Remics). A Remic is a structured transaction in which a number of MBS are resecuritised (or repackaged) into new securities.
For example, in February, Fannie Mae took the cash flows from 50 different Green MBS and then cut the cash flows into three new securities. This is because some investors require greater geographic diversity than they would get from buying an MBS backed by a single loan, or they want larger securities.
"Our green volumes for 2017 were the result of investing in piloting mortgage loan products and educating our network of lenders over seven years," said Chrissa Pagitsas, director of multifamily green financing at Fannie Mae. "As borrowers realise the benefits of lower operating costs for their properties through energy and water efficiency improvements, Fannie Mae anticipates that families will pay less in utility expenses and there will be less use of natural resources."
"Given the average age of US multifamily properties, and the very achievable 25% improvement in energy or water consumption target of our programme, we believe that 2018 Green MBS volumes could be very similar to what we saw in 2017," added Dan Dresser, Vice President, multifamily capital markets, trading and credit pricing. "Borrowers are using the timing of a refinancing or an acquisition to make green improvements to their assets – keeping our pipeline busy."