Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) want to make it easier, and more cost effective, for multifamily owners to go green.
Each of the three entities now touts lending programs designed to recognize green building measures by baking the advantages of conservation into their underwriting and all-in rates. That means owners can get additional loan proceeds, and better pricing, to make energy- and water-efficiency improvements on their properties.
The FHA took the first step back in 2009 when it began offering mortgage insurance premium (MIP) reductions on green multifamily loans, a program it enhanced earlier this year. Fannie Mae then advanced the cause starting in 2012 when it implemented its own green financing program, which has significantly expanded ever since. And the trifecta was solidified when Freddie Mac came out with its own, rival program this past August.
“All three programs will provide preferred pricing,” says Tony Liou, president of Partner Energy, an engineering firm specializing in energy efficiency. “HUD is by far the greatest discount, anywhere up to 40 basis points (bps) in lending and 75 bps in your closing costs. Fannie is talking about up to a 33 bp reduction, and with Freddie you can get anywhere from 10 to 15, depending on the deal you’ve already negotiated.”
All three programs are also able to underwrite a portion of the energy savings identified through an energy study.
Each program offers its own unique benefits and comes with its own requirements. But the fact that all three agencies now offer green mortgages is a sign of just how far the energy-efficiency movement has come, and how much the government is willing to encourage such activity.
In fact, in a striking move earlier this year, the Federal Housing Finance Agency (FHFA)—the conservator that oversees Fannie Mae and Freddie Mac—exempted most green mortgage programs from its financing cap for the government-sponsored enterprises (GSEs), freeing up more capacity for more green loans to be made.
“In 2016, we’ve seen a lot of changes in the multifamily space; however, nothing quite as big as the Federal Housing Finance Agency’s decision to exclude green-focused lending programs from the current cap of $36.5 billion,” says Drew McCreery, technical director of agency services at Partner Engineering and Science. “Fannie Mae and Freddie Mac have since put green lending in the crosshairs and made it a focus of their business strategy. This is considered a potential game changer in the industry.”
Fannie's Green Programs
For Fannie Mae, the fact that green mortgages are exempt from the cap, while welcome news, isn’t a raison d’être.
“We were doing this long before there was a volume cap, and we will be doing it regardless of what happens going forward, because we think it’s a good thing for the market,” says Bob Simpson, vice president of Fannie’s multifamily mortgage business. “We’ve seen that business really take off this year, and we think that this is a tremendous business opportunity going forward.”
Fannie Mae offers three main green lending avenues: Green Rewards, a green building certification price break, and Green Preservation Plus. Its volume of green lending has grown by leaps and bounds over the past few years as its suite of products has matured. In 2013, Fannie issued about $58.2 million in green mortgage-backed securities, a figure that climbed last year to about $308 million. But 2016 will easily shatter that record: The firm processed more than $1.2 billion in green lending in the first seven months alone, on pace for a banner year.
Fannie’s Green Rewards program will underwrite 75% of an owner’s projected cost savings, as well as 25% of the tenant-paid cost savings, which results in better pricing and up to 5% more in loan proceeds. To compute and collect the savings data, the firm will also pay for an ASHRAE Level 2 energy audit on the property in question, subject to the loan closing.
Fannie also offers a pricing break for any building that achieves one of 14 green certifications, such as LEED, Energy Star, or the National Green Building Standard. Finally, for affordable housing properties, the GSE offers the Green Preservation Plus product, which features reduced pricing, an up to 85% loan-to-value ratio, and a debt service coverage ratio that could stretch all the way down to 1.15x. Like Green Rewards, Green Preservation Plus also offers the free ASHRAE Level 2 Energy Audit, subject to loan closing.
Fannie Mae has been working on Green Rewards and Green Preservation Plus for years, an effort that began with a massive database initiative that helped prove out the concept. Initially, Green Rewards allowed for 50% underwriting of the owner-paid energy and water costs, but that figure was upped to 75% over the summer when Freddie Mac released its own product that went up to 75%.
“We did the legwork to make sure you could justify the 50%, which allowed folks to get comfortable with 75%,” says Simpson. “So the fact that there are more people coming into the market, we think, is a great sign that it’s becoming a more mature market, that people are starting to now see what we’ve known all along.”
The company cites its expertise, its delegated lending model, and the fact that it issues single-asset securities—which allows for greater deal customization rather than a one-size-fits-all approach—as its greatest differentiators.
Freddie’s Green Offerings
In July, Freddie Mac came out with its competing green mortgage product suite, dubbed Green Advantage, which features two main products: Green Up and Green Up Plus.
With Green Up, borrowers can increase the amount of their loan proceeds by 50% of the projected owner-paid cost savings, while Green Up Plus allows for underwriting of up to 75% of the savings.
As with Fannie’s program, Green Up Plus requires an ASHRAE Level 2 energy audit, for which Freddie will pay up to $3,500.
“If that green audit concludes the potential to save at least 15% in water or utilities, we will essentially make it easier for them to get the improvements by lending them more money and reducing the price,” says David Leopold, Freddie Mac’s vice president of affordable housing. “So the goal here is to inform in the green audit and then facilitate.”
Beyond these products, the firm also offers a Green Rebate Program, which gives a pricing break to any property with a qualifying green certification. All three of the products are aimed at a triple bottom line of net operating income (NOI) growth for the borrower, a better book of business for the lender, and, of course, a boon for the environment.
“Use of these products also improves the bottom line for the borrower. It results in higher NOI, less exposure to the volatility [of] utility and water prices; and, in that regard, it also gives us better collateral, so it sort of improves the risk and economics for all parties,” Leopold says.
Freddie Mac claims to have rate locked about $550 million in the first month of the Green Rebate Program, a staggering amount, which may reflect the pent-up demand for such a product suite. While Fannie Mae was clearly the trailblazer, Freddie Mac is now reaping the rewards of a rapidly maturing niche.
“Our focus in building this was, first and foremost, it had to be substantive. That’s why we didn’t come out with anything quick, and that’s why we weren’t satisfied with just accepting a certification,” says Leopold. “We weren’t giving points for bike racks; we wanted it to be substantive in terms of utility and water savings.”
The FHA Way
The FHA offers MIP reductions for both new-construction loans and mortgages for existing buildings, each with its own requirements.
For new construction, during the due diligence phase, a green building certification needs to be selected; during the application phase, owners have to commit to obtaining an Energy Star score of 75 or above while also submitting feasibility studies and documenting the method used for collecting utility data.
But the ongoing requirements are significant as well.
“Upon completion, you’re going to have to obtain and report your Energy Star score, as well as your green building certification, within 15 months of break-even occupancy,” says Partner Energy's Liou. “You’re going to have to, over the long term, implement your utility data collection methodology and then submit and maintain an Energy Star score of 75 or above annually.”
As for existing buildings, in order for them to achieve a MIP reduction, an Energy Star score of 75 or higher is needed, as is an ASHRAE Level 2 energy audit and green building certification (or a pathway to achieve it, if it hasn't already been attained).
“During the due diligence phase, you’re going to have to obtain an Energy Star score, figure out what it is today, and, if it’s less than a 75, you’re going to have to order an ASHRAE Level 2 energy audit to determine what measures need to be identified and implemented to achieve an Energy Star score of 75 or above,” Liou adds.
During the application phase, borrowers need to document their utility data collection methodolog, and submit feasibility studies, including an energy audit and a green building certification checklist.
While the requirements and benefits of all three agency programs are similar, they're still evolving. It will be interesting to see if the private sector follows the agencies down this path. But for Fannie Mae and Freddie Mac, the green financing niche is really just getting started, even given the high volume of interest with which it’s been met.
“I don’t think we’ve even begun to scratch the surface,” says Simpson.