Fannie & Freddie Can Avoid Green Home Liens

ATLANTA (CN) - Fannie Mae and Freddie Mac may restrict the purchase of mortgages subject to first-priority liens for energy efficiency improvements, the 11th Circuit ruled.

In 2008, Congress established the Federal Housing Finance Agency (FHFA) to regulate and oversee the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Banks, which together control a large portion of the country's secondary market for residential mortgages. Following the collapse of the housing market, the FHFA became conservator of Fannie Mae and Freddie Mac, a power Congress had granted it under the Housing and Economic Recovery Act of 2008.

In July 2010, Fannie Mae and Freddie Mac announced they would comply with an FHFA directive that asked them to stop buying mortgages subject to first-priority liens under Property Assessed Clean Energy (PACE) programs.

Many local governments have established PACE programs to help people fund energy-efficient home improvements. To secure repayment of the PACE funds, improved properties are subject to a lien that takes priority over all other liens.

Leon County, Fla., challenged the proposed restriction, arguing that it would destroy its PACE program. The county claimed that the agency had engaged in rulemaking without the required notice-and-comment period, in violation of the Administrative Procedure Act.

The Northern District of Florida dismissed the county's complaint, finding that the FHFA had acted as "conservator," and its directive to Fannie Mae and Freddie Mac did not constitute rulemaking. The court noted that it did not have the authority to restrain the agency's exercise of powers or functions as a conservator or receiver.

Though the county argued that the agency had acted as a regulator, rather than as a conservator, the 11th Circuit affirmed.

The FHFA directive could not constitute rulemaking, according to the decision, which noted that the law has a very narrow scope and does not apply to Fannie Mae and Freddie Mac's mortgage transactions in general.

"The directive at issue here, by comparison, does not contain any indicia of a general regulation and looks more like a discreet management decision by a conservator," Judge Rosemary Barkett wrote for a three-judge panel.

The agency's acts as conservator are not subject to judicial review, according to the ruling.

"The fact that the conservator declines to purchase any - or many - mortgages in which another entity holds a first-priority lien does not turn the FHFA's business decision into an act of rulemaking," the ruling states.

The agency acted to keep Fannie Mae and Freddie Mac solvent, and its decision falls within its powers as conservator, Barkett added.

She noted that the opportunity for public comment is not crucial where the public would simply challenge "a business assessment regarding the level of an investment risk."

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