By Michael Gergen and David Pettit
On March 19, 2013, in County of Sonoma v. Federal Housing Finance Authority, the U.S Court of Appeals for the 9th Circuit joined the 2nd and 11th Circuits in upholding a directive from the Federal Housing Finance Authority (“FHFA”) that restricts Fannie Mae and Freddie Mac from purchasing mortgages on properties encumbered by first-priority liens made under so-called Property-Assessed Clean Energy (“PACE”) programs.
PACE programs allow states and municipalities to use their power to assess levies on real property to help property owners finance various clean energy and energy-efficiency home improvements. Under a PACE program, a homeowner typically borrows money from a municipality to pay for an energy-related home improvement. The homeowner then pays the money back through a special tax assessment that is generally secured through a lien that is senior to the mortgage on the home. Because the PACE lender is a senior lien-holder with the right to foreclose on the property in case of delinquency, its loan has greater repayment security and its loan can be offered at a lower cost. Twenty-eight states and the District of Columbia have authorized municipalities to engage in some form of a PACE program; however, most of these programs have been at least temporarily suspended in response to the FHFA’s directive.
The FHFA is an independent agency that Congress created in response to the economic crisis in 2008 to oversee Fannie Mae and Freddie Mac. Under the Housing and Economic Recovery Act (“HERA”), the FHFA acts not only as a regulator with respect Fannie Mae and Freddie Mac, but also has the authority to appoint itself as the conservator for the two entities. The FHFA exercised this authority in 2008, and as conservator, has broad statutory powers to take actions “necessary to put the regulated entity in a sound and solvent condition.” HERA also significantly limits the judicial review of the FHFA’s actions as conservator by prohibiting courts from taking any action to restrain or affect the FHFA’s exercise of its powers as conservator.
Concerned that senior PACE liens would impair the value of mortgages held by Fannie Mae and Freddie Mac, the FHFA issued a letter on July 6, 2010 directing the entities to tighten lending practices regarding homes encumbered by senior liens for PACE loans. The State of California, along with several other of its counties and various other parties, challenged the directive, arguing that the FHFA acted as a regulator in issuing the directive and that this action constituted a rule requiring formal rulemaking procedures under the Administrative Procedure Act.
The U.S. District Court for the Northern District of California held that the FHFA did not properly issue the directive under its power as conservator, granted a preliminary injunction, and directed the FHFA to proceed with notice and comment rulemaking before it could issue a rule of substance similar to its July 2010 directive. The 9th Circuit overturned this decision, holding that the FHFA’s decision to direct Fannie Mae and Freddie Mac not to buy assets it deemed risky was within the FHFA’s power as conservator. Because HERA significantly limits the judicial review of actions taken by the FHFA in its capacity as conservator, the court concluded that it did not have jurisdiction to review the directive and subsequently vacated the district court’s order and dismissed the case.
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