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California files lawsuit against federal government over PACE program

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California has filed a lawsuit against mortgage giants Fannie Mae and Freddie Mac over their attempt to "strangle" a statewide program that provides homeowners with financing options to install solar panels and complete energy efficiency retrofits, Attorney General Edmund G. "Jerry" Brown Jr. announced Wednesday in San Diego.

The Property Assessed Clean Energy (PACE) program allows homeowners to pay for such home improvements through a line item on their property tax bill. Assembly Bill 811, passed in July 2008, allows local governments to create special assessment districts and partner with financial institutions to provide 20-year financing options.

The program was expected to create thousands of jobs, reduce emissions and cut homeowners' utility bills, Brown said during a press conference attended by numerous local officials at the California Center for Sustainable Energy (CCSE).

"As the nation struggles through the worst recession in modern times, California is taking action in federal court to stop the regulatory strangulation of the state's grassroots program that is spreading across the country," Brown said.

Fannie and Freddie oppose the program because it gives PACE lenders priority in recovering assessments if the property is foreclosed upon. The two organizations say the terms of such a "loan" violate their policies. On July 6, the Federal Housing Finance Agency (FHFA) agreed with Fannie and Freddie's opinion.

The lawsuit names the FHFA as the agency that has managed Fannie and Freddie since 2008. Together, Fannie and Freddie own or guarantee approximately half the home loans in the United States.

However, California law classifies PACE program financing as "assessments" rather than "loans," making them compatible with Fannie and Freddie's policies, Brown said, calling the issue a "misunderstanding."

"I believe federal officials are confused," said County Supervisor Dianne Jacob, who also spoke. "They don't understand the difference between an assessment and a loan."

Brown is hopeful the case will be decided out of court. He has written a letter to President Barack Obama, asking him to intervene. Last year, Vice President Joe Biden endorsed providing federal funding for PACE, and the Department of Energy has directed more than $150 million in federal stimulus funds to California for the program.

More than half the state's counties have instituted, or are in the process of developing PACE programs.

San Diego Mayor Jerry Sanders announced the creation of the Clean Generation Program in December 2008, which would offer the financing options outlined under the PACE program. CCSE was named the program administrator and Renewable Funding LLC signed on to provide financial assistance.

Fannie Mae and Freddie Mac's opposition of the PACE program further damages the nation's economy. The two organizations have already done enough harm to the financial system, Sanders said

"We understand that they've been burned by their own risky policies," Sanders said.

The Clean Generation program was expected to get under way this summer, but has been delayed by the controversy. The setback is a major problem for small solar companies in the region, many of which already lined up contracts based on the program.

San Diego-based Sullivan Solar Power has more than $1 million in contracts that are dependent on the program. The plight of the company's 25 employees is also in question due to the delay, said Dan Sullivan, owner of Sullivan Solar Power.

"It is beyond comprehension that a quasi-federal agency would put the brakes on something such as this," Sullivan said.

Janis Smith, a spokesperson for Fannie Mae declined to comment regarding the lawsuit. Calls seeking comment from Freddie Mac and FHFA were not returned by press time.

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California Center for Sustainable Energy

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California Center for Sustainable Energy Executive(s):

Leendert Hering

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Irene Stillings

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