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Litigation

California’s Brown Sues GSEs Over PACE

WASHINGTON — California Attorney General Jerry Brown is suing mortgage titans Fannie Mae and Freddie Mac as well as their regulator, the Federal Housing Finance Agency, for effectively killing programs that allow the state’s localities to issue bonds to finance energy-efficient upgrades made by homeowners.

Brown, a Democratic gubernatorial candidate, filed the suit yesterday in the U.S. District Court for the Northern District of California, urging the court to issue an order restraining or enjoining the agencies from refusing to participate in these property assessed clean energy, or PACE, programs, which he insisted are permitted under state law.

The PACE programs were to receive about $150 million of seed money under the American Recovery and Reinvestment Act enacted last year. But they generally skidded to a halt earlier this month after the FHFA directed Fannie Mae and Freddie Mac to tighten their underwriting standards for the PACE programs, warning they “pose significant safety and soundness concerns” and “disrupt a fragile housing finance market and long-standing lending priorities.”

The FHFA took the action after the two government-sponsored enterprises warned in a May letter that the PACE programs were structured so that the loans would be paid back via a special property tax assessment, which would take priority over the underlying mortgages in the case of defaults. That arrangement made the mortgages unacceptable to them, since it placed more risk on their holdings. The two GSEs informed mortgage providers that the energy liens could not take priority over mortgages.

PACE proponents said the FHFA’s action and the agencies’ refusal to accept mortgages with PACE loans effectively killed the programs, since Fannie Mae and Freddie Mac own or guarantee roughly half the nation’s residential mortgages.

But the suit filed by Brown charges the FHFA and GSEs are mischaracterizing and violating state law as well as the National Environmental Policy Act and Administrative Procedures Act by failing to prepare an appropriate environmental review before making their PACE decisions.

Brown asked the court to declare the PACE funding as “assessments,” which are permitted under state law, rather than “loans.” 

The suit blasted the two GSEs, saying their actions “are severely hampering California’s efforts to assist thousands of California homeowners to reduce their energy and water use, help drive the state’s green economy, and create significant numbers of skilled, stable and well-paying jobs.”

Meanwhile, the Sonoma County Board of Supervisors announced Tuesday that it would keep its PACE program open for business, despite protests from federal regulators.

The county has financed about 1,000 PACE loans since it adopted the program in 2008. It is preparing to go to market with roughly $30 million of bonds after issuing taxable debt monthly to finance the loans, which it warehoused with the county treasury until it grew to a market-ready size.

In addition, a group of PACE program stakeholders yesterday embarked on a campaign to push Congress to pass a legislative fix that would restore the programs. Over 600 individuals and organizations gathered on a conference call sponsored by the nonprofit group, PACENow, to discuss how to fight resistance from federal regulators.

“Federal regulators … let’s be clear, are trying to kill PACE,” said Cisco DeVries, president of Renewable Funding, a company that helps localities start up their own PACE programs. “That is their intent.”

The PACENow website contains a template for a letter that localities can send to their congressional representatives, as well a list of media talking points, highlighted by the argument that the federal regulators’ blockade of the programs infringes on states’ rights to develop them.

“The regulators’ action is a direct challenge to states’ rights to levy tax assessments for a public purpose,” the letter template states. “Congress … must quickly intervene to pass legislation that guarantees the right of state and local government to form special assessment districts to promote clean energy programs and restore the promise of PACE.”

At least 21 states and the District of Columbia have given localities the ability to issue bonds to finance PACE loans, according to the database of state incentives for renewables and efficiency at North Carolina State University. Most of those programs were just getting off the ground but have been suspended or canceled due to the GSEs’ resistance.

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