Financing for energy efficiency upgrades at multifamily properties, known as green loans, is growing for Fannie Mae and Freddie Mac, the government-sponsored enterprises that backed more than $100 billion in renovations in the past four years. But those loans may be turning a paler shade of green as federal lending caps kick in this month.
Those limits now lump green loans in with affordable housing loans, forcing Fannie Mae, as the Federal National Mortgage Association, and Freddie Mac, or the Federal Home Loan Mortgage Corp., to now choose between new bonds backed by mortgages to offer to investors. That change could shrink the volume of growth in green financing through next year.
The lending caps could have been even more extreme, according to Willy Walker, chairman and chief executive of Walker & Dunlop, one of the largest originators of green and affordable housing loans on behalf of the two enterprises. Walker said he urged regulators to keep some portion of green financing when establishing the most recent limits. The enterprises' lending caps are reset annually in what is called a "Conservatorship Scorecard."
"When I met with [federal regulators] about the new scorecard, I mentioned that I was disappointed that they had eliminated green financing" from being excluded from the caps, Walker said. "I explained that the program was essentially money going into the back pockets of renters."
The policy talk among the Trump administration's housing finance regulators going into discussions that led to the caps was that Fannie Mae and Freddie Mac were using the green finance programs as a way to circumvent the limits to their growth, Walker said.
Fannie Mae and Freddie Mac have become the largest U.S. lenders for energy efficiency improvement projects to the multifamily industry since 2016. That was the year that the enterprises' government overseer, the Federal Housing Finance Agency, removed multifamily green loans from their lending limits.
Moreover, the growth in their green lending programs was the primary reason the FHFA in September removed that exclusion and as of this month started counting those loans under the cap.
Freddie Mac's green financing program has resulted in annual energy savings for renters of about $170, Walker said, noting Fannie Mae's program creates $220 a year in savings.
"As such, green financing is fundamental to the enterprises' affordability mission," Walker said he told regulators.
Green lending ballooned starting in 2017. (Federal Housing Finance Agency)
Following discussions with Walker and other lenders, regulators let Freddie Mac and Fannie Mae continue to do green financing so long as at least 37.5% of the enterprises’ multifamily business is "mission-driven," meaning related to affordable housing. FHFA left it up to the two how to proceed. To meet that 37.5% bar, the agencies have to make sure green financing has some sort of affordability housing component to their programs.
The change could have an impact how green loans are structured, who gets them, the rate they can set for borrowers and the pricing that can be achieved on new bond issuances.
New Bond Offering
Last July, Freddie Mac securitized its first green bond deal backed exclusively by green loans. It has a second securitization tentatively scheduled to launch this week. Prior to this, Freddie Mac included its green loans into larger pools of bond offerings.
Fannie Mae has done nine stand-alone green bond offerings.
Those deals are giving the enterprises real feedback as to how much the market likes green deals and how much investors are willing to pay, said Peter Giles, vice president of production and sales at Freddie Mac.
The next securitization "will determine I think, very much so in 2020, how much we're going to do. We need to understand the market dynamics and the cost as we think about what we're going to do in 2020."
Evidence from the first securitization shows Freddie Mac attracted new buyers. Over 30 investors participated in the transaction, of which 17 bought for their environmental or social impact portfolios. Five were new to Freddie Mac deals, the enterprise reported.
"We'll be better positioned in the next few weeks as we have another one go out to what that price looks like," Giles said. "Then we can begin to think about pricing green appropriately."
Part of the attraction to green loans for borrowers is that Fannie Mae and Freddie Mac offer a small mortgage interest rate reduction on such loans.
Typically, a mortgage rate is reduced by about five basis points. A loan with a 4% interest rate, for example, would be reduced to a 3.95% interest rate. While that might seem small, if you apply that 5 basis point reduction to the $100 billion in loans the two agencies have made, that has saved borrowers about $50 million in loan costs.
Those savings though are costs that the agencies have to factor in to their loan pricings.
"You have to have a subsidy on [a green loan]," Giles said. "A borrower is not going to put $486 a unit into a property at the level they've been doing the last few years if there's not a reduction in spread, or some sort of benefit."
Giles estimated that in deals Freddie Mac has done, energy efficiency upgrades average about $486 per unit.
"If we are not getting credit for having a green program via the regulator's cap environment, then we would be taking a loss on the subsidy," Giles said. "So we are currently very much in the lab trying to think through how do we do green in that environment?"
Green financing is critical to the affordable multifamily housing market.
"There are some things we really believe about green," Giles said. "We think it's a worthy program, and we're very happy that we've been in it for a multitude of reasons. We think it does drive an affordability component to a tenant. It does reduce their electricity costs. We think it does reduce their water costs. And we understand part of our mission is affordability."
Fannie Mae estimates that its green loan program saves families and individuals $145 annually on their utility bills. It estimates that its program also has created 170,000 jobs to build and/or retrofit over 550,000 units. Property owners were estimated to save nearly $33 million annually through retrofitting their properties.
"We want to stay in green, but we have to solve for the cost for us to do it. And so that's what we're thinking through," Giles said.
Comments