Brown's lawsuit argues that Fannie Mae and Freddie Mac's opposition is forcing California counties to halt plans to provide the incentives. He sued the buyers and their regulatory agency, the Federal Housing Finance Agency, in Oakland U.S. District Court.
The voluntary Property Assessed Clean Energy program encourages homeowners to install solar panels, upgrade insulation and take other steps to improve energy efficiency, Brown said. Homeowners pay for the improvements through property tax assessments over a decade or more.
Fannie Mae and Freddie Mac say the programs could give counties top priority to be repaid if homeowners default on their mortgages. As a result, they said they could not buy or guarantee mortgages on properties that participate.
The Federal Housing Finance Agency affirmed that legal interpretation July 6.
"Mortgage holders should not be forced to absorb new credit risks after they have already purchased or guaranteed a mortgage," Acting Director Edward J. DeMarco said Wednesday.
DeMarco said in a statement that his agency will fight Brown's lawsuit in order to protect taxpayers, lenders and both mortgage programs.
Freddie Mac spokesman Brad German and Fannie Mae spokeswoman Janice Smith declined to comment.
Brown, the Democratic nominee for governor, argues in his lawsuit that the government incorrectly interprets the program as providing loans. He says they are classified under California law as tax assessments, which would require new owners to take over the payments if a home is sold before the improvements are paid off.
Other states have or are considering allowing similar programs.
The government is trying to nip a national development that has seen a recent surge spurred by the distribution of federal stimulus money, said Martin Chavez, executive director of Local Governments for Sustainability USA Inc. in Washington, D.C.
Twenty-three states have passed laws permitting programs like the one in California, and legislation is pending in most other states, Chavez said. He promoted similar programs during his three terms as mayor of Albuquerque, N.M.
"They're really hot and they're a great tool for homeowners to retrofit homes," Chavez said.
Brown said in a written statement that the federal government is "throwing up impermeable barriers to bank lending that creates jobs, stimulates the economy and boosts clean energy."
He announced the lawsuit in San Diego County, one of dozens of counties in California that stopped offering or preparing to offer the incentives after officials warned in May that they could violate federal rules.
As a result of the federal government's interpretation, some lenders started requiring homeowners to repay the full amount of their improvements before they could sell or refinance their homes.
The uncertainty led counties to halt the programs while Brown, Gov. Arnold Schwarzenegger and the state's congressional delegation lobbied the Federal Housing Finance Agency to permit the incentives.
California's program promotes energy independence, Schwarzenegger said in a statement backing the lawsuit. Doing away with the program "would be preposterous," he said.
Congress created Fannie Mae and Freddie Mac to buy mortgages from lenders and package them into bonds that are resold to investors. They own or guarantee about half of all mortgages, or nearly 31 million home loans worth about $5.5 trillion.
The suit asks a federal judge to order Fannie Mae and Freddie Mac to let the program go forward under California's interpretation of the law.
The federal government's stance could cost California more than $100 million in federal stimulus money, Brown said.
The state has devoted millions of dollars in federal stimulus and federal energy efficiency grant money to the programs, Brown said. State lawmakers approved legislation by Democratic Sen. Fran Pavley creating a $50 million fund to encourage the energy efficiency program, and Schwarzenegger signed the bill into law in April.
The program was proving popular before it was halted, Brown said.
Sonoma County had financed more than 800 solar and other projects worth more than $30 million, and Placer County was seeing about $2 million a month in applications before the program abruptly stopped. San Diego's program was supposed to start this summer, and Brown said its suspension left more than 100 people trained in energy retrofits without jobs.
U.S. Department of Energy spokeswoman Jen Stutsman said her agency is working with state and local governments to design funding alternatives in light of the Federal Housing Finance Authority's opposition to the property tax assessment programs.
