Citing the potential end of its lauded Long Island Green Homes energy-efficiency program and accompanying job losses, Town of Babylon officials said Tuesday they will challenge new mortgage lending guidelines from the Federal Housing Finance Agency.

The FHFA, in a directive last week, warned that such retrofit programs pose risks to lenders because they are financed as tax assessments and therefore take priority over mortgages if a homeowner defaults. The agency oversees Fannie Mae and Freddie Mac, which hold or guarantee nearly 50 percent of all mortgages in the country.

Supporters of the programs said the directive would effectively kill dozens of initiatives nationwide. An agency spokeswoman did not directly respond to that assertion, but said the FHFA "strongly disagrees" with critics who accuse it of "redlining" by making it tougher for residents in communities that have such programs to get federally backed mortgages.

Tuesday in Babylon - flanked by dozens of workers who install insulation, seal windows and hunt down leaks in drafty houses as part of the Green Homes program - Supervisor Steve Bellone announced the town is ready to sue the FHFA and vowed to keep the program operating.

"This is an outrageous attack on local government by a federal bureaucracy that is completely out of touch with the mainstream," he said, crediting the program with creating or retaining 80 jobs this year.

Separately, Rep. Steve Israel (D-Huntington) called on FHFA Acting Director Edward DeMarco to either work with stakeholders and communities or step down. In a statement, Israel said the FHFA has been "unwilling to work with us" and if DeMarco "won't help us seek solutions then he needs to resign."

FHFA says the programs, called Property Assessed Clean Energy, or PACE, are risky for lenders. "This puts the additional credit risk of the energy retrofit loans onto Fannie Mae and Freddie Mac for the mortgages they have bought or guaranteed, increasing taxpayer risk," spokeswoman Stefanie Mullin said in an e-mail.

The town, however, said that in cases of foreclosure its program requires payment only of the delinquent portion of the assessment - not the whole cost of the retrofit.

Neal Lewis, executive director of the Sustainability Institute at Molloy College, said the likelihood of homeowners defaulting is very low. "I just think they're grossly overreacting to a very good program," he said.

Since Babylon launched Green Homes in October 2008, aiming to reduce home energy costs and cut carbon emissions, retrofits of 452 homes have been completed or are under way. Under the program, after an energy audit, owners choose measures to take and an assessment is placed on the home based on the cost of the upgrades, which average about $9,000. Homeowners are billed monthly. Should they sell, the assessment stays with the property.

The FHFA directive could have implications both nationally and elsewhere on Long Island.

Earlier this year, $454 million in federal stimulus money was awarded to states for PACE programs and other energy-efficiency initiatives. New York received $40 million. Jeffrey Gordon, spokesman for the New York State Research and Development Authority, said it is unclear what will happen with PACE programs here but that the state is moving forward with other financing methods for energy-efficiency upgrades.

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