Fannie Mae's Accomplishment & What It Means for Utilities

In the news today, Fannie Mae was named the largest issuer of green bonds in the world for 2017 for the $27 billion in loans they made to finance energy and water efficiency in apartment buildings, loans then sold as bonds to investors. Click here for the announcement by the Climate Bonds Initiative.

Fannie Mae's accomplishment is not a surprise. It is the product of years of path-breaking work by the impressive multifamily team at Fannie Mae—Chrissa Pagitsas, Bob Simpson, Jeffery Hayward, and many others on the team who led this work. They deserve credit for genuine leadership.

I think it was 2011 when I met with Fannie Mae’s multifamily (MF) team to explore an important question: As the holder of mortgage risk on apartment buildings, how should they think about the electricity, gas, and water use in their properties? The team (led at the time by Drew Ades) had thoughtful ideas.

Conventional wisdom in the lending industry at the time was that MF lenders could largely ignore utility expenses as a separate line item. They assumed the building owner would manage its own utility expenses (e.g., water and gas are frequently paid by the owner), and anyway the owner’s costs are included in net operating income as a factor of loan eligibility. And similarly, lenders could ignore residents’ (renters) own utility expenses, if the building had separately metered units.

The Fannie Mae MF team was more perceptive. They saw the long-term value of helping owners to make energy and water related improvements. No matter who realized the monthly utility savings, the improvement work (e.g., fixing weather sealing on windows, adding insulation, installing high-efficiency appliances, etc.) would improve the building, preserve the property, and help residents. And, lower utility expenses would likely to make for a better loan.

Their next steps were strategic. They set-out to analyze their portfolio to substantiate the added values of more efficient properties. Importantly, they worked with the Energy Star team to deploy a tool building owners could use to benchmark energy use in an apartment building against a baseline. They tell the full story in this fact sheet.

What they found in their analysis led them to create two new loan products—first, a loan that offered the borrower additional proceeds to fund energy-related improvements, then a loan with lower finance charges for acquiring a property that already meets performance standards, all with sensitivity to the special issues presented by subsidized affordable housing.

The trajectory tells the story. In 2015, loan volume for these products was about $111 million. In 2017, loan volume was over $27 billion. (On a total book of MF business of about $67 billion.) Freddie Mac has followed the lead with similar products, and it’s reasonable a similar course. The growth in loan volume reflects strong appetite among institutional investors for these instruments and Fannie and Freddie's unique regulatory requirements.

Let's turn to explore why this news -- that Fannie Mae's efficiency financing products have been embraced by investors -- is actionable and important for utilities.

When an owner makes repairs and improvements that reduce energy and water waste in one apartment building, all of the utility’s customers benefit. Why? Reducing energy waste improves the utility system. The utility can devote its precious resources—and limited customer dollars—to deliver power that is used productively, not wasted through leaky windows and inefficient air-conditioners. For this reason, hundreds of utilities across the U.S. currently operate programs devoting billions of dollars a year to help building owners improve energy efficiency.

This leads to one over-riding point: utilities and their regulators should actively set out to help apartment building owners make use of these new loan products to finance energy efficiency repairs and improvements.

1. Offer direct incentives to support building audits owners will need to qualify for the efficiency financing loans.
2. Actively reach-out to local lenders to educate them on utility incentives and technical service available to help them with efficiency projects, so that loan officers can help owners explore energy and water projects when financing is contemplated.
3. Help owners benchmark the energy and water use of their properties. In this context, benchmarking refers to the simple process of entering utility usage information into an online tool that compares the building's use against a baseline and provides a score. Benchmarking is required for owners to make use of the Fannie Mae and Freddie Mac loan products that will finance efficiency improvements.   

It is reasonable to ask why an owner of an apartment building would need a utility's help to benchmark the energy use in their property— it's a simple process. But the surprising fact is that there are still many major utilities that do not provide apartment building owners with basic information about energy use in their building, or they make it very difficult to obtain (i.e., on paper, months later). For utilities, apartments with separate meters in the name of the resident have traditionally not been aggregated into a building total, even for the owner. This is not a difficult problem to solve—see our Landlord Portal guide -- and it's important.

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It makes a ton of sense for Fannie Mae, as well as Freddie Mac and FHA, to help Americans finance repairs and improvement to make their homes more energy and water efficient -- whether it's apartment buildings or houses. 

A few years ago, I asked if the three mortgage financing giants in the U.S.—Fannie Mae, Freddie Mac, and FHA—might become “Green Giants” because of the tremendous potential they have to help apartment building owners and single-family homeowners to make energy and water repairs and improvements. They still have a long way to go.  But they seem to be growing into the role. In the meantime, it's up to utilities to implement systems and programs to help building owners take advantage of the efficiency financing products available.