Catching Up to Europe on Green Bonds: Let’s Start with Better Homes

February 10, 2021 | By: David Heslam

Interest from institutional investors is driving a rapidly growing green bond market, to the benefit of the green construction industry. Investors are committing to incorporating environmental, social, and governance (ESG) factors into their investment decisions(1). The assets managed by these pension funds, insurance companies, foundations, endowments, sovereign wealth funds and investment managers total more than 90 Trillion dollars. There’s a great deal of capital to be put to work to support environmental, social and green investments by investors who see environmental and climate risk as credit risk and financial risk. Green bonds offer a safe, but impactful investment vehicle.

Although Europe has been outpacing the US in the development of green bond markets(2), Fannie Mae® has played a key role and has become the largest issuer in the world. Fannie Mae purchases qualifying mortgages from lenders, which it bundles into Mortgage Backed Securities (MBS) – and sells to these kinds of institutional investors. Fannie Mae issued its first Green mortgage-backed-security (Green MBS) almost a decade ago, focusing solely on the multifamily market. Due to ESG investor demand, Fannie Mae has already issued $75 billion in Green MBS for the construction of energy efficient multifamily buildings and energy efficiency rehabs of existing multifamily buildings. In 2019 alone, Fannie Mae issued $22.8 billion in Green MBS. By some estimates 40% of all multifamily-backed Fannie Mae bonds in 2019 were issued as Green MBS. Freddie Mac® followed Fannie Mae’s lead and is now also issuing green bonds for multifamily projects. 
Green MBS Issuances 
Image: Fannie Mae Green MBS issuance by year

The larger loan amounts associated with multifamily projects made the logistics of securitizing this debt through bonds easier than with single family mortgages. Basically, each multifamily mortgage can become its own bond issuance. However, the success of the Multifamily Green MBS is motivating action on single family homes as well. Fannie Mae recently launched its first green bonds based on certified new single family homes. This pilot effort is currently using a limited set of participants centered around ENERGY STAR® Certified Homes which are clearly top performing homes. With this pilot underway for newer homes now is the time to design a framework for Single-Family Green MBS that includes higher performing existing homes as well. 

Two nationally recognized home energy standards are available for existing homes: the Home Energy Score (HES) from the US federal government and Home Energy Rating System (HERS® Index) maintained by the nonprofit RESNET. Both of these rely on trained 3rd-party verifiers and now can be used in comparison to a baseline energy estimate from US Department of Energy. The establishment of this baseline for any home, combined with availability of 3rd-party verifiers, will allow Fannie Mae and Freddie Mac to have a dependable set of measurement tools with which to group the housing stock by relative energy performance and opportunities for savings. 

The availability of a SaaS platform like Earth Advantage’s Green Building Registry® (GBR) makes the implementation of such a framework much easier for all parties. Today, GBR has more than 1.7 million 3rd-party verified homes across the United States, including those from the US Department of Energy’s Home Energy Score and RESNET HERS® Index programs. Individual loan officers, appraisers, underwriters and credit risk analysts all have access to the same dataset to ensure the basis of loan origination and the verification of homes within an MBS pool are made on an apples to apples basis. That kind of transparency will help propel trust in the product for investors. 

Potential Impact 
What is the size of the market for single family lending? New home construction typically produces between 600,000 and a million homes per year and the number of those which are high performing has been increasing. About 100,000 homes a year are certified to ENERGY STAR standards. Nearly 300,000 received a HERS rating in 2020 alone. In the 2020 Fannie Mae Single-Family Green MBS pilot, the average loan was about $350,000. That means approximately $100 billion in single family Green MBS could be originated from new construction annually if the basis of qualification adjusted to include high performance homes with HERS ratings. 

Separately, about 10-20 million mortgages are originated for existing homes each year. Less than half of those are for purchase and the balance are for refinance. The majority of those homes need some level of energy-related improvements and the majority of home buyers indicate energy savings is a priority for them, but the identification of energy upgrades has been missing and the lack of recognition for improved homes by the finance markets has been lacking. If processes improve to identify and fund energy retrofits and the energy performance of every home receives consistent consideration, then I think at least 5-10% of existing homes could be recognized as better performers in any given year, which means about 1 million of these mortgages could be identified as Green MBS loans every year. That could occur because the home is already a good performer or because the home was just improved with the funds from the mortgage. Since existing homes sell for less over all, the average mortgage would be lower than in the new home example. If we use $250,000 as the average loan amount and 1 million transactions, then an estimated $250 billion in annual Green MBS that could be originated through the existing homes market. Suddenly, the overall Green MBS opportunity associated with single family mortgages could be 10 times the size of the current multifamily market, while helping over a million families each year with the finance of and recognition for their home’s enhanced performance. 

To make this opportunity become reality sooner, rather than later, Earth Advantage is working with partners across the country to help ensure the standards and systems are in place to enable this level of financial investment in the single family residential market can be conducted with transparency and trust. 

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[1] Financial Times 1/3/2021, “Analysts expect as much as $500bn of green bonds in bumper 2021”,
[2] Bloomberg, 12/21/2020, “US Falls Further Behind Europe in Fast-Growing ESG Market”,