Fannie Mae, Freddie Mac Sued by California Over Energy Improvement Program

California Attorney General Jerry Brown sued Fannie Mae and Freddie Mac over claims the companies thwarted a program that allows property owners to pay for energy upgrades over time through special tax assessments.

The complaint, filed today in federal court in Oakland, California, is based on the Property Assessed Clean Energy program. Under the program, local governments pay to make properties more energy efficient and owners repay the costs through the special property tax levy, according to the complaint.

Fannie Mae and Freddie Mac have blocked the program by improperly characterizing the assessments as loans, and telling lenders that they won’t fund mortgages on properties that participate in the program, according to the suit.

“Because Fannie Mae and Freddie Mac control the mortgage resale market, lenders will not issue mortgages that do not meet Fannie Mae’s and Freddie Mac’s requirements,” according to the complaint. “As a result, Fannie Mae’s and Freddie Mac’s determination -- which misrepresents California law -- essentially forecloses residential Property Assessed Clean Energy programs.”

California Counties

Almost one half of California’s counties have developed the programs or plan to start one, Brown said in an e-mailed statement. His lawsuit seeks to require the companies to recognize California law and allow the program to proceed.

The Federal Housing Administration, Fannie Mae and Freddie Mac have financed more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.

Fannie Mae and Freddie Mac bought $46 billion in first mortgages and the FHA insured $52.5 billion in home-purchase loans in the first quarter of 2010, according to an analysis of mortgage data by Potomac Partners in Washington. Fannie Mae and Freddie Mac also backed $150 billion in mortgage refinancing during the period.

“Fannie Mae and Freddie Mac received enormous federal bailouts but now they’re throwing up impermeable barriers to bank lending that creates jobs, stimulates the economy and boosts clean energy,” Brown, the Democratic candidate for governor, said today at a news conference in San Diego.

Fannie Mae spokeswoman Janis Smith and Stefanie Mullin, a Freddie Mac spokeswoman, declined to comment.

Letters, Liens

On May 5, Fannie Mae sent letters to lenders describing the tax assessments in the Property Assessed Clean Energy, or PACE, program as “loans” with “senior lien status to a mortgage,” according to the lawsuit. A Freddie Mac letter on the same date reminded mortgage sellers and servicers that an “energy-related lien may not be senior to a mortgage delivered to Freddie Mac,” Brown said in the complaint.

On July 6, according to the suit, the Federal Housing Finance Agency issued a statement confirming that the Fannie Mae and Freddie Mac lender letters “remain in effect,” according to the suit. The statement acknowledged that by affirming the Fannie Mae and Freddie Mac letters, the agency stalled California’s PACE program, according to the suit.

“The lender letters and the Federal Housing Finance Agency statement intentionally mischaracterize California law relating to the Property Assessed Clean Energy program in order to support their unfounded contention that participating in PACE is contrary” to Fannie Mae’s and Freddie Mac’s policies, according to today’s complaint.

The case is California v. Federal Housing Finance Agency, 10-03084, U.S. District Court, Northern District of California (Oakland).

To contact the reporters on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net; Bill Callahan in San Diego at callahan@san.rr.com.

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