Fannie Mae and Freddie Mac want to make it easier for owners of older apartment buildings to make energy efficient upgrades.
Both government sponsored enterprises discount the interest rates on loans for buildings with one of several “green” certifications, such as LEED, or Leadership in Energy and Environmental Design.
They are also offering to underwrite some of the projected savings from upgrades on buildings of a certain age, allowing owners to take out bigger loans.
The new products have the potential to unleash large amounts of capital, reducing the carbon footprint of some of the biggest users of energy, residential buildings. A significant portion of the nation’s multifamily housing stock dates back to a construction boom in the 1960s and 1970s, and has yet to benefit from efficiency gains over the past few decades in refrigeration, clothes washing, heating, ventilation, air conditioning equipment, windows and insulation.
Landlords, lenders, and even mortgage bond investors stand to benefit as well, since lower utility bills and more comfortable apartment units tend to reduce tenant turnover.
“This is a no brainer,” said Buzz Roberts, president and chief executive of the National Association of Affordable Housing Lenders.
“It’s a good thing for borrowers, it’s good for Fannie and Freddie and lenders, because it makes them more competitive,” he said. “And energy improvements make for a safer asset, insulating a property against increases in energy costs.”
Fannie and Freddie are not required to finance energy retrofits, but this kind of lending is consistent with Obama Administration initiatives to promote energy efficiency in low- and moderate-income communities.
It also discourages borrowers from turning to other lenders to finance retrofits, creating a separate lien on the property.
“We want to make our financing a one-stop shop, so borrowers aren’t going to a third party,” said Chrissa Pagitsas, director of Fannie Mae’s multifamily green initiative.
Another potential benefit: Fannie and Freddie may attract new investors to their commercial mortgage bonds, which can be marketed as green, or at least greener.
Fannie Mae recently increased the discount on interest rates for loans on green-certified buildings, to up to 39 basis points from 10 basis points originally.
For owners of older vintage buildings, there are two products: Green Rewards for conventional and affordable rental housing, and Green Preservation Plus, which is only available for affordable rental housing. To qualify, borrowers need to demonstrate a capital plan to reduce energy usage or water usage by at least 20%. Fannie now reimburses the cost of the audit. If approved, borrowers also receive a pricing discount. For Green Rewards loans, the loan can be upsized by underwriting up to 75% of the owner’s projected energy and water cost savings and 25% of the tenant’s projected energy and water cost savings.
“We want to help owners fix the leaks, get a better dishwasher, put in a more energy-efficient heating and cooling system,” Pagitsas said. “A better quality unit means lower turnover. And turnover is a huge expense, and not just because the unit sits vacant; the landlord has to paint and clean the carpets.”
Fannie Mae puts the additional loan proceeds in escrow. The owner cannot access them until they have made the improvement.
Then, for the life of the loan, the property owner needs to report its ENERGY STAR FormScore. This will allow Fannie Mae to compare financial metrics with energy metrics. “Scores can move … we don’t put a borrower in default if a building’s score goes from 55 to 35,” Pagitsas said. “It could have been cold winter or there could have been a change in operating staff.”
The program was launched in January; through July, over $1.2 billion was financed.
Freddie also gives discounted loan pricing for properties with at least one affordable rental unit that have one of several industry-standard green building certifications.
Borrowers can also get discounted loan pricing and additional funding by improving the water and energy efficiency of their buildings. Owners of properties at least 20 years old who commit to reduce energy and water consumption by at least 15% can choose from two products, Green Up and Green Up Plus. To qualify, they must complete a property assessment to identify energy and water savings opportunities.
The borrower receives a menu of potential improvements and can pick any combination that will achieve the targeted reduction, so long as they spend at least $250 per unit. Freddie reimburses some or all of the cost of the assessment when the loan closes.
Like Fannie, Freddie monitors the energy use of the building for the life of the loan.
Peter Giles, vice president of multifamily production and sales, said the loans can be underwritten as quickly and efficiently as a conventional multifamily loan, which is key to getting borrower acceptance.
He said the program serves multiple purposes. “Tenants are happy with lower utility bills. We’ve heard owners say that they actively market the fact that their building is green.” The owner also benefits directly from lower bills for utilities on common areas such as hallways and pools. “And obviously, there’s the environmental benefit.”
Freddie originally targeted $3.5 billion a year, but based on commitments to date, Giles thinks it could reach $5 billion a year. As of mid-September, the company had quoted over $1 billion of loans, and rate locked, but not closed, on $550 million.
Of course, green loans can be used as collateral for green mortgage backed securities. This is especially true for Fannie Mae, which securitizes single multifamily loans into single MBS. Pagitsas said the company is already seeing a variety, both in terms of both geography and loan size, matching the company’s conventional portfolio. Deals range in size from $3 million to over $100 million.
“You can get pretty targeted with a single-asset MBS,” said Bob Simpson, vice president for multifamily affordable, green, and small loan financing. “There are a lot of socially motivated investment funds that are looking at MBS,” he said.
Freddie, by comparison, pools multiple multifamily loans into collateral for its K-Deals. It intends to pool green loans as collateral alongside conventional loans as well as other special products such as manufactured housing, student housing and senior housing loans.
While green lending has the potential to attract new investors to K deals, Giles said that Freddie has seen no impact, positive or negative to date, on K deals to date. It sees data collection as a more important benefit.