California Attorney General Jerry Brown filed a lawsuit Thursday against mortgage giants Fannie Mae and Freddie Mac for blocking a clean energy financing program. The program, Property Assessed Clean Energy (PACE), is designed to stimulate the economy and promote energy independence by assisting homeowners and small businesses in securing loans to make their properties more energy efficient. PACE, backed by President Obama, was in the process of being implemented in states, counties and cities around the nation, including California. At issue is whether repayment of funds obtained through the program have priority over Freddie and Fannie mortgages. The government-sponsored enterprises (GSEs) contend that as written, PACE funds would be a priority lien on a property, rather than the first mortgage. Fannie and Freddie both gave negative views of PACE last week, rejecting arguments by proponents who said the programs would create jobs and improve energy efficiency. In California, Brown said the program was expected to create “tens of thousands” of green jobs. Brown blasted the mortgage giants during an afternoon press conference in San Diego, a city that had planned to launch a PACE program this summer, but which has since put the program on hold. “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. Under the program, property owners repay the costs of energy improvements through assessments spread out over a decade or more. Under California law, these costs are classified as tax assessments. Brown said Fannie and Freddie have effectively shut down the program by wrongly characterizing the PACE assessments as loans that must be subordinate to their own mortgages. Combined, the GSEs guarantee or own half of all mortgages in the US. The Federal Housing Finance Agency (FHFA), the conservator for the two GSEs, and which is named in the lawsuit, affirmed Fannie and Freddie’s decision on July 6 over the objections of Brown and congressional leaders. FHFA said Thursday it will launch a strong defense of the lawsuit. “In keeping with our safety and soundness obligations, the Federal Housing Finance Agency will defend vigorously its actions that aim to protect taxpayers, lenders, Fannie Mae and Freddie Mac,” the agency said in a press statement about the suit. “Homeowners should not be placed at risk by programs that alter lien priorities and fail to operate with sound underwriting guidelines and consumer protections. Mortgage holders should not be forced to absorb new credit risks after they have already purchased or guaranteed a mortgage.” Boulder, Colo., Sonoma County, Calif. and several other cities and counties made hundreds of loans each through PACE, while other cities and states were at various stages of creating programs, according to The Wall Street Journal. San Francisco officials suspended the residential portion of the city’s $150m PACE program in May, before making any loans, after Fannie and Freddie noted their opposition. All PACE programs were suspended last week, the Wall Street Journal reported. The stakes are high for California where almost half the counties there have developed PACE programs or planned to start one. As a result, California risks losing more than $100m in federal stimulus money, Brown contends. “Fannie Mae and Freddie Mac received enormous federal bailouts,” Brown said, “but now they’re throwing up impermeable barriers to bank lending that creates jobs, stimulates the economy and boosts clean energy.” In his lawsuit, Brown asks the court to apply California law, require Fannie Mae and Freddie Mac to recognize PACE assessments as assessments and not loans, and allow PACE to continue. Write to Kerry Curry.