The Importance of Single-Family Green Mortgage-Backed Securities

Editor's note: This article appears in the April 2021 issue of DS News magazine, available here. 

Arthur Johnson serves as VP of Fannie Mae’s Capital Markets, leading the Mortgage-Backed Security (MBS) Policy team
responsible for maintaining the integrity of its securitization programs. The team provides policy guidance and decisions related to business priorities impacting MBS and related disclosures.

Prior to this role, Johnson held several positions in various organizations within Fannie Mae, including Single-Family Operations, the Treasurer’s Office, and Project Management that supported several corporate initiatives to enhance Fannie Mae’s securitization programs. Johnson holds an MBA in International Finance from American University and a Bachelor of Arts in Economics from the University of California, San Diego. Earlier this year, Fannie Mae announced that it issued $111 million in Single-Family Green Mortgage-Backed Securities (MBS) since April 2020, when it first introduced
these transactions to the market. The program is part of Fannie Mae’s larger effort to tie its business activities to measurable and positive Environmental, Social, and Governance (ESG) outcomes.

DS News had a chance to speak with Johnson and discuss the importance of this new initiative to the market and how it has been received by the industry to date.

Describe Fannie Mae’s Single-Family Green Mortgage-Backed Securities program and what it means for the market.

As of January, Fannie Mae had issued more than $100 million in green bonds within 10 months of the program’s inception. That is a great milestone for us. Back in 2019, we were considering how we were going to construct this program, and there were multiple directions we could go. We ended up deciding to start off small and slow, in order to ensure that we could build out the infrastructure to support the program that we wanted. We felt that if we were sporadic in our issuances of these bonds, the market may not take it seriously.

We focused first on newly constructed residential properties with specific certification standards. We partnered with a third party to evaluate all the outstanding certifications, and with their help, we collaboratively decided that Energy Star Version 3.0 was a great guideline to start our program.

Energy Star products are nationally and globally known. Energy Star homes are, on average, 20% more efficient than those built to code. That alone was a good story that we thought investors would like.

Did you have a timeline in mind to hit the $100 million mark? How did you envision this playing out?

We didn't have any goals because we wanted to see how it was going to work out. We had talked to several market participants prior to initiating this program just to get their insight. This type of program was so new to them that they didn't really have a perspective or what type of investment they would want to participate in. Market participants, from an investor standpoint, got on board quickly, and it enabled us to more quickly get to this point than we thought we were going to. 

In the beginning, investors were particularly hesitant … it was new to them. But as we continued the programmatic issuances of the securities, I think it started to peak more and more interest, and we got interest from an investor spectrum—money managers, bank portfolios, and insurance companies. 

We finally went out with a public auction in August 2020, and then a second one just recently. There was more investor interest than we thought there was going to be, and we sold these in auctions, a handful of the securities that we have issued previously. In both cases, we did see a pay up on the securities more than the intrinsic value of the underlying collateral. 

What would you attribute as the primary thing that really helped increase interest from both investors and from the builder lenders? 

There was something out there that garnered the interest. It was something new, particularly for investors. They understand mortgage-backed securities, and I think as the investor communities are given more funds for environmental, social, and corporate governance (ESG) investments, I think this is a good place for them to start investing. 

Now, we have an outlet for a green bond that they can invest in and understand the positive environmental impact for the securities that they're investing in. From a builder's perspective, they have that same vision. They understand the importance of energy-efficient homes in two aspects. One is the positive environmental impact that benefits our communities. Second is the cost savings to the borrower. With lower utility costs, they have more disposable income to be able to buy other things they need. This program provides another avenue to get both of those messages out there, which I think has enticed them to want to participate. 

With Earth Day around the corner on April 22, 2021, what are your revised goals now that you have reached this significant milestone? 

We are very optimistic that this program is going to continue to grow. 

Fannie Mae’s SVP and Chief Economist Douglas G. Duncan had mentioned in 2020, despite the pandemic, that total single-family starts were at their highest point since 2007. This is expected to continue over the next several months. Energy Star indicated that in 2019, they certified more than two million single-family home properties, as well as apartments. With those two figures, we just think that it's the right opportunity for growth. In addition, we continue to want to have new builders and lenders participate in the program. 

We're now looking at other certifications that are equivalent or better to Energy Star Version 3.0, so that will give us more volume.  

Lastly, and this is sometime in the future, but we know retrofitting will be a big market. We are looking at how we can incorporate that into this program. The one thing we want to be mindful of, and it's what our guiding principle was in the very beginning, is that we want to be steady and consistent in our program. We want people to have confidence in it and make it a lasting program. 

Any closing thoughts as Fannie Mae expands its environmental, social, and governance efforts? 

I just want to emphasize that this is just another step in Fannie Mae's goal for introducing initiatives that are positive environmentally and socially positive.  

We know our multi-family side has been in this space since 2010, issuing green bonds up to $85 billion, which is very impressive. And, they just issued a new social bond this week. It's just a continuation of these programs building on our Fannie Mae ESG efforts.