M-PIRE was a collaborative pilot between the New York City Energy Efficiency Corporation (NYCEEC) and Fannie Mae that helped Fannie Mae develop green mortgage products.
Fannie Mae: The Federal National Mortgage Association (“Fannie Mae”) is a government-sponsored enterprise that ensures a secondary market for home mortgages by purchasing home loans and packaging them into securities for sale to investors. Fannie Mae accounts for about 20% of the outstanding U.S. multifamily mortgage debt, playing a critical role in its liquidity, stability, and affordability. In an effort to use this leadership to make multifamily properties more environmentally friendly, sustainable, and affordable, Fannie Mae began developing its Multifamily Green Financing business in 2010. Since then, Fannie Mae has built expertise in estimating energy- and water-efficiency savings, developing product offerings that translate those savings into larger loans for borrowers and earnings for investors.
New York City Energy Efficiency Corporation (NYCEEC): Founded in 2011, the New York City Energy Efficiency Corporation (NYCEEC) is a nonprofit finance company that provides financing and technical assistance to help building owners and tenants improve energy efficiency and realize the associated savings. NYCEEC provides direct loans, as well as loan loss reserves and other forms of credit enhancement. Because energy efficiency financing is still new to many financial institutions, credit enhancement is an important tool for NYCEEC. In the years after its founding, the organization was especially keen to use its credit enhancement capacity for largescale opportunities. As CEO Susan Leeds put it, “We looked for large institutions who we felt that by providing them a credit enhancement in the form of a cash-funded loan loss reserve, we could perhaps induce them to terms and conditions in their existing loan product that would make them more amenable to financing energy efficiency technology.”
This case study focuses on an NYCEEC pilot program called Multifamily Property Improvements to Reduce Energy (M-PIRE). M-PIRE leveraged a guarantee from NYCEEC to build capacity at Fannie Mae that eventually led to the launch of a subsequent product called Green Rewards, which has been successful without any external credit enhancements. For context, the case study also describes a predecessor product, Green Preservation Plus.
Developing a new green business line entailed risk for Fannie Mae, its Delegated Underwriting and Servicing (DUS®) lenders, and the investors that ultimately buy its mortgage-backed securities. Fannie Mae and the U.S. Department of Housing and Urban Development (HUD) jointly developed its first green product, Green Preservation Plus. Green Preservation Plus enables Fannie Mae’s multifamily lenders to offer larger loans than they could otherwise offer based on traditional assessments of capital needs and historical cash flows, allowing owners of affordable housing to use the additional loan proceeds to finance energy- and water-efficiency improvements. Since this was Fannie Mae’s first foray into lending against projected energy savings, HUD agreed to take the first loss of these larger loans.
Though a successful product, Green Preservation Plus applied only to a limited portion of the housing market— owners of properties that are affordable due to a federal, state, or local subsidy or property-based rent restriction. To reach the broader commercial market and expand its green product offerings to additional types of housing, such as co-ops and market-rate multifamily buildings, Fannie Mae needed to further develop its capacity. Fannie Mae—and its DUS lenders and investors—needed to gain comfort with the technical assessment of projected cost savings from energy- and water-efficiency in different types of properties. New green loan products carried “unproven business model” risks associated with making correct assessments.
According to Chrissa Pagitsas, who leads Fannie Mae’s Multifamily Green Financing business, Fannie Mae was introduced to the New York City Energy Efficiency Corporation (NYCEEC) by foundations that recognized potential synergies in their work. Loss-sharing with HUD had been a critical element of the Green Preservation Plus product, and NYCEEC played a similar role for M-PIRE. Given the scale and diversity of its real estate market, New York City was a good place for Fannie Mae to further its product development.
NYCEEC provided a funded guarantee in the form of a collateral custodial account held at U.S. Bank. The guarantee would cover losses for the first four years of any loan equaling up to 50% of the amount the loan increased as a result of underwriting the energy-efficiency cost savings. Key sticking points in the negotiations included the calculation of fees to be paid to NYCEEC once the guarantee was deployed for a loan, the method of tracking energy performance over time, and the extent to which NYCEEC would be involved in the lending process. Extended negotiations resolved these issues over the course of more than a year, during which the organizations learned about each other’s core businesses and different perspectives. NYCEEC learned to understand the requirements and processes of Fannie Mae and its DUS lenders, while Fannie Mae benefited from NYCEEC’s technical expertise in energy-efficiency audit protocols.
The M-PIRE program originated only one loan for USD 865,000 to enable a property owner in the Bronx to switch from heavy heating oil to natural gas and to improve pipe insulation. Due to specific considerations in the New York City real estate market, demand for the M-PIRE loan product was low. In the New York City real estate market, the main competitive factor is interest rate, while the main benefit of the M-PIRE product for borrowers was higher loan amounts. Given its policies and market conditions, Fannie Mae had little room to adjust pricing. However, the partnership with NYCEEC provided a valuable opportunity for Fannie Mae to further develop its expertise in green financing, lessons applied to a subsequent, nationwide loan product called Green Rewards. The Green Rewards program, which includes many of the same innovations and benefits developed in M-PIRE, has enjoyed significant success without credit enhancement. In 2016, Fannie Mae closed USD 3.6 billion in green financing, including Green Rewards.
As a result of the M-PIRE collaboration, Fannie Mae was able to further develop a new product line that included adjustments to their typical credit parameters. The pilot also established best practices for incorporating energy- and water-efficiency audits into routine property assessments. In summary, the NYCEEC guarantee enabled a test program that allowed Fannie Mae to gain comfort with underwriting projected energy-efficiency cost savings—and ultimately to launch a successful, nationwide business line that reduces energy and water use throughout the United States. Chrissa Pagitsas noted that Fannie Mae is “realizing social benefit, environmental benefit, and, obviously, financial benefit through the green financing business.”
A programmatic guarantee supported mortgage loans for energy-efficiency improvements that did not meet Fannie Mae’s typical lending parameters. In particular, it enabled lenders to factor energy savings into calculations of the loan amount, which are traditionally based on estimated cash flows from the property.
|Size of Guarantee||
USD 5 million
|Size of Program||
The program was able to lend up to USD 200 million, of which an estimated USD 10 million was related to energy-retrofit financing and therefore covered by the USD 5 million NYCEEC guarantee.
Increased energy efficiency through green retrofits
|Objectives of the Guarantee||
The guarantee (and broader partnership with NYCEEC) aimed to enable Fannie Mae to gain expertise and comfort with underwriting projected cost savings from energy- and water-efficiency, allowing them to further develop their green financing products.
|Type of Risk Addressed||
The guarantee helped mitigate the risk associated with lending to an unfamiliar sector, along with risk related to the “unproven business model” of new green loan products.
The guarantee covered 50% of the incremental loan amount associated with energy and water efficiency investments.
The guarantee was funded in the form of a collateral custodial account held at U.S. Bank, which earned interest. NYCEEC charged a fee that would be paid when loans were originated under the program.
|Triggers and Access||
Fannie Mae had the right and ability to unilaterally draw on the guarantee funds, as long as there were collateralized losses as specified in the Master Program Agreement between Fannie Mae and NYCEEC. The account was also subject to a Collateral Pledge Agreement among NYCEEC, U.S. Bank, and Fannie Mae, which further specified the conditions for access to the account.