California Attorney General Jerry Brown filed a lawsuit Wednesday against mortgage giants Fannie Mae and Freddie Mac and their federal regulator over their opposition to a home energy-improvement program backed by the Obama administration.
The regulator, the Federal Housing Finance Agency, last week dealt a blow to that initiative when it directed Fannie and Freddie to avoid participating in the program.
The program to encourage home-energy improvements, called Property Assessed Clean Energy, or PACE, allows municipalities to make loans through special property-tax assessments for homeowners to install solar panels, energy-efficient heating systems and other upgrades. Local governments sell municipal bonds to fund loans that property owners pay off over 15 to 20 years.
The program raised concerns among mortgage investors and regulators because PACE liens, like all property-tax assessments, are senior to existing mortgage debt. That enables cities to sell bonds more easily because in the event of a foreclosure, PACE liens are paid off before the mortgage lender can recoup any money.
FHFA and the Office of the Comptroller of the Currency have said the programs don’t have sufficient safeguards to ensure that homeowners have the ability to repay the new debt. Representatives of Fannie, Freddie and the FHFA declined to comment Wednesday.
Advocates say the companies and federal regulators are undermining a novel financing mechanism to leverage private-sector investments to fund energy retrofits, which will create jobs and encourage conservation.
Mr. Brown said in a statement that he was taking legal action “to stop the regulatory strangulation of the state’s grass-roots program.” Mr. Brown, a former California governor, is the Democratic nominee in this fall’s gubernatorial election.
The lawsuit, filed in federal court Wednesday, challenges the authority of federal regulators to restrict local governments’ ability to use their tax-assessment authority. The state also seeks to force regulators to conduct an environmental review before taking any steps that could curtail the program’s reach in California.
Mr. Brown said Fannie and Freddie had created “impermeable barriers to bank lending” after having “received enormous federal bailouts.” The federal government took over Fannie and Freddie nearly two years ago and has injected $145 billion to keep the companies afloat.
Supporters say they also plan to introduce legislation in Congress that would put the programs on solid footing. “We’ve got a problem, and the problem are the regulators,” said Jeffrey Tannenbaum, the founder of PACENow.org, an advocacy group, on a conference call with supporters on Wednesday.
Nearly two dozen states have passed laws that allow municipalities to set up the programs, and several cities, including San Francisco and San Diego, had planned to start offering PACE loans this summer. Advocates say the regulatory directives have made it impossible for the municipalities to claim millions in federal stimulus money to set up the programs.
by Nick Timiraos of the Wall Street Journal