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Babylon Town sues feds over mortgage rules

The Town of Babylon Tuesday filed a lawsuit against the federal agency that oversees Fannie Mae and Freddie Mac, charging that the agency's new mortgage guidelines violate state and federal law, as well as the U.S. Constitution.

The lawsuit targets the Federal Housing Finance Agency over a directive the agency issued in July stating that energy-efficiency retrofit programs pose risks to lenders because they are financed as tax assessments - and therefore take priority over mortgages if a homeowner defaults.

Babylon and other municipalities said this directive will essentially kill off dozens of such programs that have started up across the country and will result in the loss of hundreds of jobs. Earlier this year, $454 million in federal stimulus money was awarded to states for these programs - called Property Assessed Clean Energy, or PACE - and other energy-efficiency initiatives. Fannie Mae and Freddie Mac hold or guarantee nearly 50 percent of all mortgages in the country.

"The FHFA, in their actions, is trampling on this document," said Babylon Supervisor Steve Bellone said Tuesday as he held up a copy of the Constitution. "They are stating that municipalities cannot invest in plugging up leaky houses and buildings."

The town charges that the FHFA is violating the 10th Amendment by prohibiting states from levying and regulating special assessments. The 10th Amendment states that powers not reserved for the federal government by the Constitution are reserved for states. FHFA spokeswoman Stefanie Mullin Tuesday declined to comment on the Babylon case, other than to say the agency stands behind a July 14 statement that states it will "defend vigorously its actions that aim to protect taxpayers, lenders, Fannie Mae and Freddie Mac. Homeowners should not be placed at risk by programs that alter lien priorities and fail to operate with sound underwriting guidelines and consumer protections."

In Babylon's two-year-old Long Island Green Homes program, after an energy audit, homeowners choose measures to take and an assessment is placed on the home based on the cost of the upgrades, which average about $9,000 and can include work such as sealing leaks. Unlike PACE programs, where the costs are placed on the property's tax bill, with Green Homes, homeowners are billed monthly under a special assessment, said the program's director, Sammy Chu. Should they sell, the assessment stays with the property. If the homeowner falls behind on the payments, the amount that is overdue - not the entire cost of the work - is then placed onto the property's tax bill, he said. The town said 587 homes have either been retrofitted are or in the process of having work done, with an average savings to homeowners of $1,068.65. No one in the program has defaulted, they said.

Several municipalities, including the state of California, have filed similar lawsuits against the FHFA since July.

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