CA Sues FHFA Over Efficiency Program

by | Jul 16, 2010

The state of California announced Wednesday that it would sue two quasi-government agencies over their decision not to purchase mortgages from participants in the Property Assessed Clean Energy (PACE) energy efficiency program, according to a report in The San Francisco Chronicle.

State Atty. Gen. Jerry Brown named the Federal Housing Finance Authority (FHFA), the agency which oversees government-backed mortgage companies Fannie Mae and Freddie Mac, saying the agency had illegally interfered with a California program to promote building efficiency.

Fannie and Freddie effectively killed PACE, which allows property owners to pay for the cost of energy improvements to their homes or businesses through an additional charge on their property tax, by refusing to accept loans on buildings in the program.

The program lends property owners money to make energy saving upgrades and then repay the loan through a 20 year scheme secured by a lien. The lien would take priority over a mortgage repayment in the event that an owner defaulted. The program is similar to the 37,000 other lien programs throughout the country that municipalities regularly use to fund infrastructure improvements such as sewers and sidewalks.

The two mortgage buyers had argued that participation in the PACE program increased risk of non-payment of the mortgage, saying it created significant safety concerns. In a letter written two weeks ago, the FHFA wrote:

“First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors. The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives.”

Brown accused the FHFA of mischaracterizing the program as a loan rather than an assessment, and argued its decision not to cooperate with the program could cost the state up to $100 million in government subsidies. The suit asks the court to compel Fannie and Freddie to recognize the program as assessments.

The effective death of the PACE program has already forced San Diego to layoff 100 workers who were trained to participate in the program with thousands of additional construction and retrofitting jobs now at risk, while more than $450 million in planned projects have been put on hold with an uncertain future, according to the L.A. Times. The program had been expected to create up to 20,000 jobs in the Bay Area alone, according to a report in the San Jose Business Journal.

The PACE program had been expected to help grow the U.S. commercial business efficiency business to up to $5.6 billion a year. Property owners had been eligible for loans up to $50,000.

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