Brown Sues to Defend PACE Financing Program

By Thomas Lord
Thursday July 15, 2010 - 12:15:00 PM

California’s Attorney General Edmund G. Brown Jr. is striking back in defense of PACE programs. PACE (“Property Assisted Clean Energy”) programs, such as Berkeley FIRST, are described in a July 13 story in the Berkeley Daily Planet. Brown has filed a suit on behalf of the state of California against the Federal Housing Finance Agency, its director Edward DeMarco, the Federal Housing Finance Agency, Freddie Mac, its CEO Charles E. Haldeman, Jr., Fannie Mae, and its CEO Michael J. Williams.. 

The suit urgently asks the US District Court for the Northern District of California to reverse the effect of recent letters from Fannie Mae, Freddy Mac, and FHFA that have caused the suspension of PACE programs throughout the state and around the nation. The court is asked to declare that PACE financing to homeowners is, under California law, a tax assessment not a loan.  

Freddie and Fannie treat PACE financing as a loan superior to any first mortgage, and therefore decline to buy or sell mortgages for properties with PACE liens under their lending rules. Assessments, traditionally used for such things as sidewalk improvements or burying utility lines, are consistent with the lending rules but loans superior to a mortgage are not. In California, PACE was authorized by the legislature as an assessment but mortgage holders disagree with that characterization. The court is asked to affirm that PACE repayment does, as an assessment, take legal priority over mortgage repayment. The suit argues that the defendants have engaged in unfair business practices under California law by asserting their objections. 

In a curious twist, the suit also argues that FHFA’s recent actions have enormous environmental impact. Under the National Environmental Protection Act, federal agencies must complete and environmental assessment or impact report before taking such actions. The suit asks that FHFA be ordered to take no further action against PACE programs until such an environmental study is completed. 

In his press release, Brown stressed the economic and employment benefits of PACE programs and noted that their suspension means California may lose over $100 million in federal economic stimulus funds. In an earlier letter to FHFA, Brown’s office estimated the potential PACE-related losses to Fannie and Freddie at between $75 and $100 per California mortgage. If California-style PACE programs spread to all 50 states, with Freddie and Fannie holding approximately 31 million mortgages, that would amount to between $2.3 billion and $4.7 billion in losses for the mortgage giants.