COUNTY OF SONOMA; People of the State of California, ex rel. Kamala D. Harris, Attorney General; Sierra Club; City of Palm Desert v. FEDERAL HOUSING FINANCE AGENCY; Edward DeMarco, in his capacity as Acting Director of Federal Housing Finance Agency; Federal Home Loan Mortgage Corporation; Federal National Mortgage Association
No. 12-16986
United States Court of Appeals, Ninth Circuit
March 19, 2013
710 F.3d 987
Kamala D. Harris, Attorney General of California; Janill L. Richards, Supervising Deputy Attorney General; Jason A. Malinsky, Deputy Attorney General, Oakland, CA, for Plaintiffs-Appellees.
Before: STEPHEN REINHARDT, JOHN T. NOONAN, and MARY H. MURGUIA, Circuit Judges.
OPINION
MURGUIA, Circuit Judge:
Defendant-Appellant Federal Housing Finance Agency (“FHFA“) is the regulator and conservator of Freddie Mac and Fannie Mae (the “Enterprises“). The Enterprises are government-sponsored entities that purchase and securitize residential mortgages. FHFA issued a “directive” preventing the Enterprises from buying mortgages on properties encumbered by liens made under so-called property-assessed clean energy (“PACE“) programs, which finance environmental improvements on residential properties and in return take an interest in those properties senior to any mortgagees’ interest. Plaintiffs-Appellees, including the State of California and several of its counties, are stakeholders in PACE programs. Plaintiffs-Appellees contend that FHFA acted as a regulator, and not a conservator, when it directed the Enterprises to cease purchasing mortgages on PACE-encumbered properties. And in acting as a regu-
The district court entered a preliminary injunction requiring FHFA to complete a formal rulemaking under the Administrative Procedure Act (“APA“),
We now conclude that FHFA‘s decision to cease purchasing mortgages on PACE-encumbered properties is a lawful exercise of its statutory authority as conservator of the Enterprises. Because the courts have no jurisdiction to review actions that FHFA takes as conservator, we VACATE the district court‘s order and DISMISS the case.
I. Background
A. Housing and Economic Recovery Act of 2008
The Enterprises, Fannie Mae and Freddie Mac, purchase and securitize residential mortgages. They are governed by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (“Safety and Soundness Act“),
In 2008, Congress passed the Housing and Economic Recovery Act of 2008 (“HERA“), which amended the Safety and Soundness Act.
HERA also grants FHFA the power to place the Enterprises into conservatorship, and FHFA did so on September 6, 2008. See
HERA substantially limits judicial review of FHFA‘s actions as conservator. The law states: “Except as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.”
B. Property-Assessed Clean Energy Programs
States—including California—and municipalities have long used their powers to assess levies on real property to finance community improvements, such as sidewalks and lighting. See, e.g.,
California authorized cities and counties to establish PACE programs in July 2008.
C. FHFA‘s Directive Regarding PACE programs
On June 18, 2009, FHFA‘s Director sent a letter about PACE programs to the leaders of associations representing state bank supervisors, credit union supervisors, residential mortgage lenders, state governors, and state legislatures. The letter described the “emerging trend” of PACE programs, and stated that the effect of the “first lien status” of PACE loans is “to impair the value of first mortgages to creditors and any subsequent holder of first mortgages and, at the same time, to create risks for homeowners.” The Director stated further that the programs may “create risks to homeowners by increasing borrower debt payments that could cause a greater possibility of default; [and have a] negative impact on the marketability of the home.”
On July 6, 2010, FHFA issued a “Statement on Certain Energy Retrofit Loan Programs.” FHFA distinguished PACE “loans” from routine tax assessments in that their size and duration exceed typical local tax programs and lack the community benefits associated with taxing initiatives. FHFA stated that the loans present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities, and are not essential for energy conservation. FHFA stated further that PACE underwriting “results in collateral-based lending rather than lending based upon ability-to-pay, the absence of Truth-in-Lending Act and other consumer protections, and uncertainty as to whether home improvements actually produce meaningful reductions in energy consumption.” FHFA said the PACE programs’ first liens could disrupt a fragile housing market, noting the absence of underwriting standards to protect homeowners and the absence of energy saving standards to allow for the valuation of the home improvements. Together, FHFA said, these issues “combine to raise safety and soundness concerns.”
In the July 6 letter, FHFA directed the Enterprises to: (1) “[a]djust[] loan-to-value ratios to reflect the maximum permissible PACE loan amount available to homeowners in PACE jurisdictions;” (2) “[e]nsur[e] loan covenants require approval/consent for any PACE loan;” (3) “[t]ighten[] borrower debt-to-income ratios to account for additional obligations that could be associated with possible future PACE loans;” and (4) “[e]nsur[e] that mortgages on properties in a jurisdiction offering PACE-like programs satisfy all applicable federal and state lending regulations and guidance.” FHFA further instructed the Federal Home Loan Banks, over which it has regulatory authority—but not a conservatorship—to “review their collateral policies in order to assure that pledged collateral is not adversely affected by energy retrofit programs that include first liens.” On July 14, 2010, FHFA issued a statement that, in keeping with its safety and soundness obligations, FHFA would vigorously defend the policies laid out in the July 6, 2010 directive.
On August 31, 2010, Freddie Mac and Fannie Mae each issued letters to lenders stating that the Enterprises would cease purchasing mortgage loans secured by a property with an outstanding PACE loan, originating on or after July 6, 2010, with first lien priority.2 Additionally, the Enterprises required that in order to refinance a PACE-encumbered property, an owner must generally pay off the entire outstanding PACE assessment.
Finally, on February 28, 2011, after this litigation began, FHFA sent a letter to the Enterprises’ general counsels. The letter stated, “The Conservator reaffirms that PACE programs present significant risks to certain assets and property of the Enterprises—mortgages and mortgage-related assets—and pose unusual and difficult
D. Prior Proceedings
In 2010, the State of California, the Sierra Club, Sonoma County, Placer County, and the City of Palm Desert all filed actions against FHFA and related entities concerning the PACE directives. The claim germane to this appeal, made in each of the operative complaints, is that the July 6, 2010, directive from FHFA to the Enterprises constituted a “rule” under the APA, and therefore could not have been issued lawfully until FHFA engaged in formal rulemaking.
Sonoma County moved for a preliminary injunction, which the district court granted, holding that section 4617(f)‘s prohibition on judicial review of FHFA‘s actions as a conservator was inapplicable, because FHFA engaged in substantive rulemaking beyond a conservator‘s ken. The district court left in place FHFA‘s directive to the Enterprises, but ordered FHFA to commence formal rulemaking. The preliminary injunction was stayed pending appeal.
Following oral argument on FHFA‘s appeal of the preliminary injunction, we submitted the case and issued an order stating that we would take no action on this appeal until after the district court ruled on the parties’ motions for summary judgment, which had been filed in the interim. The district court granted summary judgment in Plaintiffs‘-Appellees’ favor and, finding that FHFA failed to comply with the APA‘s formal rulemaking requirements, entered an order requiring FHFA to publish a final rule concerning the PACE programs by “210 days from the date of entry of this Judgment,” October 16, 2012.
II. Standard of Review
We review de novo the district court‘s summary judgment. Pac. Coast Fed‘n of Fishermen‘s Ass‘ns v. Blank, 693 F.3d 1084, 1091 (9th Cir.2012).
III. Discussion
As courts may take no “action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver,”
The scope of FHFA‘s power as conservator is a matter of first impression before this Court, but no longer a matter of first impression among our sister circuits. In Town of Babylon v. FHFA, 699 F.3d 221
We agree. As conservator, FHFA has “all the rights, titles, powers and privileges of the [Enterprises].”
A decision not to buy assets that FHFA deems risky is within its conservator power to “carry on” the Enterprises’ business and to “preserve and conserve the assets and property of the [Enterprises].”
Further, although it is not our place to substitute our judgment for FHFA‘s, there is, in this case, no doubt that FHFA‘s actions relate directly to the soundness of the Enterprises’ assets. The PACE liens affected by FHFA‘s directive are superior to the mortgages owned and securitized by the Enterprises. As FHFA explains, such superior liens increase the risks borne by a mortgage-holder substantially: if a borrower is unable to continue paying his mortgage and the property is sold at foreclosure, the proceeds from the foreclosure sale go to the PACE lender first. A mortgage-holder is thus left with only what
The district court observed that FHFA‘s July 6, 2010, letter addressed not just the Enterprises—of which FHFA is conservator—but also the Federal Home Loan Banks, of which FHFA is only a regulator. The breadth of the letter‘s audience, the district court reasoned, suggests that the directive FHFA issued in that letter was a regulation requiring a formal rulemaking. The letter, however, directed the Enterprises and the Federal Home Loan Banks to do different things: the Enterprises were directed to take the action that formed the germ of this lawsuit; the Federal Home Loan Banks were directed only to review their collateral policies. That FHFA treated different entities differently undermines, not supports, the conclusion that it was undertaking regulatory activity applicable to all the entities under its regulatory purview.
The district court further observed that the breadth and prospective nature of FHFA‘s action suggested it had engaged in backdoor rulemaking. While both the breadth and prospective nature of an agency‘s action are hallmarks of an administrative rule, Yesler Terrace Cmty. Council v. Cisneros, 37 F.3d 442, 448 (9th Cir.1994), their presence alone does not dispose of the question in this case, because we do not assume from the outset that FHFA acted as a regulator rather than as a conservator. In other words, if we begin from the premise that FHFA‘s directive was issued in its capacity as a regulator, we might conclude the directive was a rule and that formal rulemaking procedures were required. But as we are trying to establish whether FHFA acted as a regulator in the first place, the rule-like nature of its action is somewhat less probative, because nothing precludes a conservator from making business decisions that are both broad in scope and entirely prospective. Consequently, we agree with the Eleventh Circuit‘s observation that “[t]he fact that a conservator declines to purchase any—or many—mortgages in which another entity holds a first-priority lien does not turn the FHFA‘s business decision into an act of rulemaking.” Leon Cnty., 700 F.3d at 1279. The categorical nature of the PACE directive, as opposed to a case-by-case refusal to purchase PACE-encumbered mortgages, does not change the fact that FHFA‘s decision is in furtherance of the conservation and preservation of the Enterprises’ assets.
In concluding that the PACE directive is a lawful exercise of FHFA‘s power as conservator of the Enterprises, we recognize that FHFA‘s power has limits. As FHFA acknowledges, HERA distinguishes between FHFA‘s authority as regulator and as conservator, and FHFA cannot evade judicial review and the APA‘s requirements for rulemaking simply by invoking its authority as conservator. Analysis of any challenged action is necessary to determine whether the action falls within the broad, but not infinite, conservator authority.
Because we conclude that FHFA acted within its powers as conservator, neither we nor the district court have jurisdiction over Plaintiffs‘-Appellees’ claims. Be-