In practical terms, the bottom line for Fannie Mae isn’t a small thing; the lending company oversees a $200 billion loan portfolio in the United States, slightly less than the GDP of Peru. That means when lending standards or mortgage rates change, what may appear like a miniscule shift actually has a massive effect on the lender’s overall business. It makes the company’s new Green Initiative, a financing tool announced in February that provides a break for multi-family homes with recognized green building certification, an encouraging sign that sustainable building practices aren’t just better for the Earth. In the long run, they’re better for the banks, too.
“The only reason the program is taking off is because we looked at the financial, social, and environmental arguments,” says Chrissa Pagitsas, director of the Green Initiative at Fannie Mae. “I think about the triple bottom line. Our tenants have better quality housing and save money; we get better quality properties in our portfolio and the environment benefits.”
In the works for five years, the Green Initiative is the first program in the US market that has figured out how to recognize, asset manage, and securitize green building loans. Builders and property owners with a multi-family building project that has a recognized, third-party certification—such as LEED, Energy Star, or Green Globes—can apply for this loan and receive a 10 basis point reduction, equivalent to a tenth of a percentage point (single-family projects have other sets of incentives and breaks). If you were applying for a $10 million loan for an apartment building, the Green Initiative would lower your interest rate. By shaving the prevailing rate from, say, 4 to 3.9%, the program would save $95,000 over the life of a 10-year loan. Looking at it from another perspective, these savings can help recoup the up-front capital costs of investments such as solar panels, themselves a money saver over time, and provide an incentive to retrofit an existing building and apply for the proper certification.
The size of the loan portfolio Fannie Mae oversees in the US
How long the Green Initiative was in the works before its launch
The basis point reduction that multi-family building and property owners with a recognized, third-party certification can receive
Amount of green loans Fannie Mae has securitized thus far
These are investments this sector requires to catch up to the rest of the US building stock. Dr. Gary Pivo of the University of Arizona conducted a study in 2012 that found that multi-family homes have 34% fewer energy efficiency features overall than other types of housing. Fannie Mae has also partnered with the Department of Housing and Urban Development on the initiative, providing encouragement for owners of affordable housing to seek out the same break.
Pagitsas sees the program’s roll-out as a shift in how property managers view their investments and portfolios. It took years to build the foundation, so when they ramped up and started offering the program, they had a solid base of understanding how all the different factors played off each other.
For Fannie Mae, there’s definitely a healthy amount of self-interest in promoting this initiative. Green homes have lower energy costs, which means the owner has more free cash to pay Fannie. Investors are also increasingly seeking out green investments, and now Fannie Mae has a ready source of loans to securitize and sell. They’ve already securitized $130 million in green loan thus far.
“There are only certain levers that you can maneuver in the financial world, give more money or reduce interest rates,” says Dan Winters, a Senior Fellow: Business Strategy and Finance at the US Green Building Council. “Freddie Mac has been talking about something like this for awhile, but hasn’t done it. This is a driver for Fannie Mae to $130m be more competitive. Think about the ripple effect of this. Appraisers need to think about what it means to be green. It begins to differentiate projects in the marketplace more. You are establishing benchmarks, making the whole process more systemic. It’s yet another positive piece of the puzzle that helps move the market towards adopting greener construction.”
Pagitsas is the first to admit that getting certification isn’t the only way to go green. But she believes the initiative can help establish best practices, and create financial systems that reward good actors instead of greenwashing.
“This kind of program can provide certainty to groups such as Wall Street,” she says. “I want this program to help encourage more property owners to achieve the certification that meets their business plans. I want the awareness and level of green building to skyrocket. I want lenders to understand this, make it the lingua franca of financing.”