Tax-exempt Fannie Mae multifamily green paper finds an audience

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The first multifamily tax-exempt mortgage-backed bonds to qualify for the Fannie Mae Green Rewards program were oversubscribed when they priced last week.

The $74 million deal was priced by Wells Fargo Securities Nov. 13 at a 2.35% interest rate.

Fannie Mae calls the structure M-TEB, for MBS as Tax-Exempt Bond Collateral.

The 2019 Series N bonds issued through the California Housing Finance Agency, a state treasurer's conduit, will help pay for the renovation of 195-unit Noble Towers, an assisted living community for low-income seniors in Oakland.

Wells Fargo managing directors Matt Engler and Pete Cannava said given the popularity of commercial mortgage-backed security deals, they don’t think the green distinction affected pricing because the nature of the product tends to draw a broad class of investors.

They did say, however, that some investors told them they were interested in the bonds based on the green distinction.

“We had seven investors on the transaction including municipal bond bunds, hedge funds, Community Reinvestment Act banks, and CMBS buyers,” Engler said. “Of those, we had three who expressed interest because it was green.”

One order went into green investment funds and two other investors said the fact it was green was important because they have investors who are committed to investing in green finance, Engler said.

“The subscription level we had on this deal, it would be hard to say it had a true pricing impact,” Engler said. “We had enough orders we would have been able to clear the deal even without the orders interested in green bonds.”

According to a Stanford University study, more investors are willing to purchase bonds backing environmentally conscious projects, but they are not willing to pay more for those bonds.

The study released by Stanford Graduate School of Business professors David Larcker and Edward Watts in February found that municipal bond investors are not willing to pay a premium for green bonds. They are demanding the exact same returns as they would receive for bonds without an environmentally sustainable distinction, according to the report.

“In contrast to a number of recent theoretical and experimental studies, we find that in real market settings investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects,” according to the report. “When risk and payoffs are held constant, municipal investors view Green and non-Green securities by the same issuer as almost exact substitutes. Thus, the greenium is zero.”

The Stanford professors said they were motivated to look at the issue as more than $88 trillion in assets under management globally are said to be invested in accordance with environmental, social and corporate governance, or ESG, principles. They zeroed in on the municipal bond market and the $23 billion in green bonds issued between 2013 and 2017 for more than 2,500 individual securities for their study.

To say the green designation affected pricing, Cannava, a Wells Fargo managing director, said they would have had to see investors willing to buy below what was offered in order to get green bonds, and that did not happen.

The deal did price at one of the tightest spreads to swaps of any of Fannie Mae’s M.TEB transactions, said Cannava, adding that because the bonds look like CMBS though they are federally tax-exempt the benchmark used is spread to swaps as opposed to the Municipal Market Data indices.


To qualify for Fannie Mae’s Green Rewards program, the project has to achieve 30% savings on water and energy, of which at least 15% of the total savings is energy savings. Typically, improvements include such features as low-flow toilets and shower heads and the installation of energy efficient lighting.

The Related Companies and East Bay Asian Local Development Corporation purchased the 37-year-old apartment community in 2004.

Wells Fargo decided to market the bonds with the green designation after they learned that Related Companies and East Bay Asian Local Development Corporation were applying for Fannie Mae’s green rewards program.

With Fannie Mae’s program, the borrower doesn’t seek out a third party on their own.

The government-sponsored enterprise engaged the Center for International Climate and Environmental Research to review its green bond framework in June 2018. CICERO issued an opinion that Fannie Mae’s aligns with the International Capital Market Association’s green bond principles, according to the bond offering statement.

Fannie Mae is also in the process of adding the U.S. Environmental Protection Agency water score, a score indicating relative water consumption for multifamily properties to a list of required reporting form borrowers in the green financing business.

By participating in the program, the developers can receive a lower interest rate than on non-green loans, up to an additional 5% in loan proceeds and a 100% free energy audit paid by Fannie Mae. The developers are required to use a third-party to collect and report energy and water performance data.

Fannie maintains a Green Measurement and Verification Service to streamline the reporting process for the borrower and the lenders.

The deal also drew more interest from municipal funds than Engler said he has seen in other M.TEB deals. Engler said that may be because he and Cannava also worked on the Federal Home Loan Mortgage Corporation’s first fixed-rate deal in a federal tax-exempt loan program for affordable multifamily properties in March.

“It had mostly been crossover CMBS banks and investors purchasing Fannie Mae’s tax-exempt M.TEBs,” Engler said. “We had large participation from municipal funds.”

The pair spent a lot of time meeting with investors prior to the March deal, which securitized loans from Freddie Mac, the other large government sponsored housing-loan enterprise.

“We spent a lot of time educating investors,” Engler said. “So we could go back to the people who bought the Freddie deal.”

That $266 million transaction garnered a lot of interest, Cannava said.

“We leveraged what we had done with Freddie Mac’s ML certificates,” Cannava said. “That deal generated a lot of interest, because we did a lot of one-on-ones with investors. Investors who participated in that deal liked it and wanted more paper. Those who didn’t participate in the Freddie Mac deal learned about how these programs work.”

While the Freddie Mac program aggregated multiple loans for affordable multifamily projects and securitized them in the market, this Fannie Mae deal only applies to one project.

Fannie Mae Multifamily issues MBS that can be used as collateral for either existing fixed-rate bond refundings, or new fixed-rate bond issues in conjunction with 4% Low-Income Housing Tax Credits.

The bonds received a Aaa rating with a stable outlook from Moody’s Investors Service, based on Fannie Mae's rating.

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Green bonds ESG Affordable housing bonds Sell side California Housing Finance Agency Fannie Mae California
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