ENERGY EFFICIENCY:

Recent court ruling favors White House-backed loan program

After a series of court rulings this year, the fate of a White House-supported home energy efficiency program continues to hang in the balance.

At stake is the Property Assessed Clean Energy program, or PACE, which allows property owners to obtain loans for energy efficiency projects. More than 20 states have authorized such programs.

Litigation has been ongoing since the Federal Housing Finance Agency, as conservator of the troubled federal housing corporations Fannie Mae and Freddie Mac, expressed strong concerns last year about the implications for lenders and effectively halted the program.

States, environmental groups and some local government entities immediately filed suit in several actions around the country.

Initially, rulings by two judges in New York were in the agency's favor, but late last month supporters of the program got the victory they wanted when a judge in California partly ruled against FHFA.

In an Aug. 26 ruling, U.S. District Judge Claudia Wilken of the Northern District of California declined to dismiss the claims made by California and several local government entities and also ordered that FHFA hold a notice and comment process concerning its approach to the program.

It was not a total win for PACE advocates, as Wilken declined to impose a preliminary injunction that would have restarted the program.

The legal battle now looks set to continue.

FHFA argues that the loans increase the risk for mortgage lenders because the PACE loans are treated as a first lien on the property.

In case of default, the mortgage lenders take the hit rather than the organizations that loaned the funds, which in many cases are private entities, FHFA says.

In July 2010, the agency released a statement raising "significant safety and soundness concerns" about the program that led to Fannie Mae and Freddie Mac announcing that they would no longer purchase mortgages on properties that had outstanding PACE loans. Other lenders followed suit.

One of the key elements of Wilken's ruling was that she concluded the plaintiffs had standing to sue, something the judges in New York had not found, in part because there was no guarantee that banks would recommence lending even if FHFA reversed its position.

Wilken disagreed, saying that "plaintiffs' interests could be protected by a resulting change in the FHFA, Fannie Mae and Freddie Mac policy, spurring lenders to renew financing of PACE-encumbered properties."

Furthermore, by finding that FHFA is required to seek notice and comment, Wilken agreed with one of the primary claims made by the plaintiffs, which is that the 2010 statement was a final agency action reviewable by a court under the Administrative Procedure Act.

FHFA contends that the statement was a policy pronouncement.

"It definitely marks a turning point in the litigation," said Kit Kennedy, a lawyer for the Natural Resources Defense Council, which had filed one of the New York suits.

Kennedy is hoping there will be an "outpouring of comments on the value of PACE programs."

Ethan Elkind, a climate change research fellow at the University of California, Los Angeles, School of Law, said the ruling was clearly a setback for FHFA.

By ordering notice and comment, Wilken had "acknowledged this is more than any old policy guidance," he said. "That could pose problems for FHFA going forward."

It is not yet clear whether FHFA intends to appeal Wilken's decision. The agency declined to comment.

Click here to read the California court ruling.

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