(CN) – California, the Sierra Club, and several counties and cities can move ahead with a lawsuit alleging that Fannie Mae and Freddie Mac hindered a federal stimulus program meant to finance energy-conservation projects, a federal judge ruled.
U.S. District Judge Claudia Wilken in Oakland, Calif., refused to dismiss claims that Fannie and Freddie misinformed mortgage lenders about the true nature of the Property Assessed Clean Energy (PACE) program and violated federal environmental and administrative laws.
California, Sonoma and Placer counties, the city of Palm Desert, and the Sierra Club sued the Federal Housing Finance Agency (FHFA), the Federal National Housing Association (Fannie Mae), the Federal Loan Mortgage Corporation (Freddie Mac), and their directors in 2010. They claim that the agencies discredited the PACE program in a series of letters sent to lender groups around the country. They also allege that the defendants violated the Administrative Procedures Act (APA) and the National Environmental Policy Act (NEPA) by adopting an arbitrary policy against the program and failing to provide proper notice. Individual plaintiffs allege violations of the 10th Amendment and the savings clause as well. There are three similar cases currently moving through federal courts in New York and Florida.
Part of the American Recovery and Reinvestment Act of 2008, the PACE program is a financing model that allows local governments to issue bonds to fund energy efficiency and renewable energy projects, according to the U.S. Department of Energy, which oversees the program. Property owners that benefit from the projects pay back the up-front loan through property assessments secured by a lien and charged to their property-tax bill.
In letters to banking and creditor trade groups, mortgage regulators, governors and state legislators in 2009 and 2010, the FHFA “asserted in general terms that the PACE program posed risks to homeowners and lenders,” according to the ruling.
Fannie and Freddie followed suit, and soon the agencies announced that they would not purchase mortgages that were involved in the PACE program. Since PACE liens take priority over mortgage loans, the government said they make it more difficult to alienate encumbered properties, which endangers the security interests of entities that buy the mortgages as investments.
The agencies moved to dismiss all of the claims, but Judge Wilken ruled on Friday that at least some of the allegations can move forward.
“Plaintiffs have alleged that, prior to the July 2010 statement, PACE programs were operational and PACE participants were able to refinance their mortgages, Wilken wrote. “Accepting the allegations as true, the financing and benefits previously afforded by PACE programs could be renewed as a result of new information gleaned through the notice and comment and environmental review processes and a resulting change in defendants’ position and related marketplace practices,” she added.
Wilken determined that the plaintiffs’ NEPA and APA claims can move forward, but she dismissed Placer County’s claims that the FHFA violated the commerce clause of the 10th Amendment. She also denied the plaintiffs’ motion for declaratory judgment and left the Sierra Club out of the APA claim, finding that the environmental group “bears a significantly less direct relationship to the mortgage market” than the other plaintiffs.
“Here plaintiffs allege that the FHFA’s policy changed the status quo by thwarting financing for PACE-encumbered properties, thus curtailing energy conservation efforts that were ongoing beforehand,” Wilken wrote in refusing to dismiss the NEPA claim. “The policy, by the terms of the July 2010 statement, aimed to place PACE programs on ‘pause,’ and changed the status quo by blocking these emerging environmental conservation efforts, through the direction of marketplace practice.”
“The alleged reaction of the marketplace to defendants’ actions and the rapid demise of PACE programs establish a sufficient causal connection between defendants’ actions and plaintiffs’ purported injury,” she added.
Wilken also partly granted Sonoma County’s motion for a preliminary injunction. While the county requested restoration of the status quo, Wilken agreed only as far as ordering the FHFA to “proceed with the notice and comment process” related to its PACE policymaking.