At the corner of a busy intersection in East Oakland sits a three-story apartment building that looks like many others in Northern California. As with many buildings in the notoriously housing-starved Bay Area, its tenants aren’t always happy.

A complaint filed last year claimed that a third-floor apartment had leaking windows and mold. One from 2019 reported that the landlord was attempting to convert a crawl space into five bedrooms. City inspectors verified the complaint and found that the landlord began construction without securing the necessary permits — and the rooms had leaking sewer and plumbing lines and were lacking “adequate means of egress.”

Given this history as well as the building’s age — it was built in 1950 — it might be no surprise that the structure scored poorly on energy and water audits conducted last year. It scored in the 45th percentile for energy use and a pitiful 14th for water use.

When the building’s owner, Frank Li, refinanced a $6.1 million loan for the property earlier this year, the loan was purchased by the behemoth government-supported mortgage company Fannie Mae, who repackaged it as a “green bond” and sold it to investors looking for environmentally friendly assets. In return for borrower-friendly loan terms and free energy and water audits, Li agreed to install upgrades to reduce the building’s energy and water use by a combined 30 percent within a year.

Fannie Mae, which along with its sibling company Freddie Mac owns more than 60 percent of all U.S. home mortgages, exists to support affordable housing in the U.S. To do so, it purchases mortgages worth billions of dollars each year from lenders across the country, packages them into financial products called mortgage-backed securities, and sells them to investors, whose investments then allow people like Li to take out new loans to buy new properties or make improvements to ones they already own. When the underlying homes or buildings are considered sustainable — or on the path to becoming so — they’re packaged into “green” mortgage-backed securities, which are considered a type of “green bond.”