Court Opinion

ID: 855621
Source: CourtListenerOpinion
Date Created: 2013-03-19 20:28:05.421428+00
Date Added: 2024-06-11T13:22:37.840204
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

COUNTY OF SONOMA; PEOPLE OF            No. 12-16986
THE STATE OF CALIFORNIA, ex rel.
KAMALA D. HARRIS, Attorney               D.C. Nos.
General; SIERRA CLUB; CITY OF        4:10-cv-03270-CW
PALM DESERT,                         4:10-cv-03084-CW
             Plaintiffs-Appellees,   4:10-cv-03317-CW
                                     4:10-cv-04482-CW
COUNTY OF PLACER,
   Intervenor-Plaintiff-Appellee,
                                        OPINION
                v.

FEDERAL HOUSING FINANCE
AGENCY; EDWARD DEMARCO, in
his capacity as Acting Director of
Federal Housing Finance Agency,
           Defendants-Appellants,

               and

FEDERAL HOME LOAN
MORTGAGE CORPORATION;
FEDERAL NATIONAL MORTGAGE
ASSOCIATION,
                  Defendants.
2                COUNTY OF SONOMA V. FHFA

         Appeal from the United States District Court
            for the Northern District of California
        Claudia Wilken, Chief District Judge, Presiding

                 Submitted December 22, 2012*

                       Filed March 19, 2013

         Before: Stephen Reinhardt, John T. Noonan,
            and Mary H. Murguia, Circuit Judges.

                    Opinion by Judge Murguia

                           SUMMARY**

               Federal Housing Finance Agency

    The panel vacated the district court’s order and dismissed
for lack of jurisdiction a case challenging a Federal Housing
Finance Agency directive.

   The FHFA issued a “directive” preventing Freddie Mac
and Fannie Mae from buying mortgages on properties
encumbered by liens made under property-assessed clean
energy programs (“PACE”), which finance environmental
improvements on residential properties. The panel held that

    *
    The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
              COUNTY OF SONOMA V. FHFA                    3

the FHFA’s decision to cease purchasing mortgages on
PACE-encumbered properties is a lawful exercise of its
statutory authority as conservator of Freddie Mac and Fannie
Mae. The panel held that the courts have no jurisdiction to
review actions that the FHFA takes as a conservator, and
dismissed the case.

                       COUNSEL

Stephen E. Hart, Federal Housing Finance Agency; Howard
N. Cayne, Lisa S. Blatt and Asim Varma, Arnold & Porter
LLP, Washington, D.C., for Defendants–Appellants.

Kamala D. Harris, Attorney General of California; Janill L.
Richards, Supervising Deputy Attorney General; Jason A.
Malinsky, Deputy Attorney General, Oakland, California, for
Plaintiffs–Appellees.

                        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
4              COUNTY OF SONOMA V. FHFA

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 regulator, Plaintiffs–Appellees argued in the
district court, FHFA would require more than a fiat to order
the Enterprises to stop buying mortgages on PACE-
encumbered properties: as a regulator, Plaintiffs–Appellees
contended, FHFA must issue a regulation to effectuate its
order.

    The district court entered a preliminary injunction
requiring FHFA to complete a formal rulemaking under the
Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701, et
seq., in order to implement its directive on PACE-
encumbered properties properly. FHFA appealed, and we
stayed the injunction insofar as it required FHFA to issue a
final rule. We then deferred any further action on FHFA’s
appeal until after the district court ruled on the parties’
motions for summary judgment. The district court entered
summary judgment in Plaintiffs’–Appellees’ favor, finding
that FHFA “failed to comply with the APA’s notice and
comment requirement.” The district court enjoined FHFA to
complete notice-and-comment rulemaking within 210 days
from the issuance of its judgment. FHFA again appealed.

    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.
               COUNTY OF SONOMA V. FHFA                     5

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”),
12 U.S.C. §§ 4501, et seq.

   In 2008, Congress passed the Housing and Economic
Recovery Act of 2008 (“HERA”), which amended the Safety
and Soundness Act. Pub. L. No. 110-289, 122 Stat. 2654
(codified at 12 U.S.C. § 4511). HERA established the
Federal Housing Finance Agency (“FHFA”), an independent
agency charged with supervising the Enterprises and the
Federal Home Loan Banks. FHFA has statutory powers as
both the regulator and the conservator of the Enterprises. As
regulator, FHFA must ensure that the Enterprises operate “in
a safe and sound manner,” “foster liquid, efficient,
competitive, and resilient national housing finance markets,”
operate “consistent[ly] with the public interest,” and comply
with all applicable laws. 12 U.S.C. § 4513(a)(1)(B). The
FHFA Director “shall issue any regulations, guidelines, or
orders necessary to carry out the duties of the Director.” Id.
§ 4526(a). FHFA’s regulations are subject to APA notice-
and-comment rulemaking. Id. § 4526(b).

    HERA also grants FHFA the power to place the
Enterprises into conservatorship, and FHFA did so on
September 6, 2008. See 12 U.S.C. § 4617(a)(2) (“[FHFA]
may, at the discretion of the Director, be appointed
conservator or receiver for the purpose of reorganizing,
rehabilitating, or winding up the affairs of a regulated
6               COUNTY OF SONOMA V. FHFA

entity.”). The conservatorships were the result of the
economic downturn and housing market collapse, which
eroded the value of the Enterprises’ assets. FHFA has
separate statutory powers as conservator of the Enterprises.
As conservator, FHFA succeeds to “all rights, titles, powers,
and privileges of the regulated entity, and of any stockholder,
officer, or director of such regulated entity with respect to the
regulated entity and the assets of the regulated entity.” Id.
§ 4617(b)(2)(A). HERA further enumerates other broad
powers FHFA has as conservator, including to take actions
“necessary to put the regulated entity in a sound and solvent
condition” and actions as may be appropriate to “preserve and
conserve the assets and property of the regulated entity.”
Id. § 4617(b)(2)(D). FHFA has the “incidental power[]” to
take “any action authorized by this section, which the Agency
determines is in the best interests of the regulated entity or the
Agency.” Id. § 4617(b)(2)(J)(ii).

    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.” Id.
§ 4617(f) (emphasis added). Accordingly, if the directive
challenged here is a lawful exercise of FHFA’s power as
conservator of the Enterprises, the courts have no jurisdiction
over Plaintiffs’–Appellees’ claims, and this case must be
dismissed.

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
               COUNTY OF SONOMA V. FHFA                      7

lighting. See, e.g., Cal. Const. art. 13D (establishing that
governments may levy special assessments against real
property to pay for permanent public improvements). In a
more recent use of this assessment authority, legislatures have
authorized state and local governments to implement PACE
programs. The programs provide financing for individual
home improvements aimed at reducing water and energy use
and providing clean power. A government entity pays the
cost of the retrofit and imposes an assessment on the real
property in the amount of the improvement cost. The funds
are raised through the sale of bonds, and assessment revenue
is pledged to repay the bonds.

    California authorized cities and counties to establish
PACE programs in July 2008. Cal. Sts. & High. Code
§§ 5898.12(b), 5898.20. Pursuant to California law, PACE
assessments create liens on real property that have priority
over mortgages. Property owners pay a portion of the
assessment annually as part of their property tax payments.
Id. § 5898.30. When the property is transferred, sold, or
foreclosed upon, any amount that is delinquent is due. The
remainder of the assessment remains as a lien on the property.
Cal. Rev. & Tax. Code § 3712. Speaking generally,
foreclosure of a higher-priority—senior—lien on property
(e.g., a PACE lien) terminates any junior liens on the property
(e.g., a mortgage purchased by one of the Enterprises). See
Restatement (Third) of Property (Mortgages) § 7.1 (1997).

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
8              COUNTY OF SONOMA V. FHFA

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 May 5, 2010, Fannie Mae and Freddie Mac each
issued a lender letter to the home mortgage industry. The
Fannie Mae letter stated that PACE loans generally have first
lien priority over previously recorded mortgages and the
Enterprises’ Uniform Security Instruments prohibit loans
with lien status senior to a mortgage’s.1 The Freddie Mac
letter explained that energy-related liens may not be senior to
mortgages delivered to Freddie Mac.

    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

   1
     The Uniform Security Instruments are the documents used when
originating mortgage loans.
               COUNTY OF SONOMA V. FHFA                       9

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,
10             COUNTY OF SONOMA V. FHFA

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 risk management challenges for the
Enterprises.” FHFA expressly invoked its statutory authority
as conservator under 12 U.S.C. § 4617, as well as its duty to
preserve and conserve the Enterprises’ assets, and directed
the Enterprises to “continue to refrain from purchasing
mortgage loans secured by properties with outstanding first-
lien PACE obligations and carefully monitor through their
seller-servicers any programs that create such first-lien
obligations.”

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.

   2
     The FHFA “grandfathered” in PACE first-priority liens for
homeowners who obtained PACE loans before July 6, 2010.
               COUNTY OF SONOMA V. FHFA                      11

    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 Enterpises,
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,” 12 U.S.C. § 4617(f), the question
before us is whether FHFA’s directive to the Enterprises to
discontinue purchasing PACE-encumbered mortgages is a
12               COUNTY OF SONOMA V. FHFA

lawful exercise of its authority as conservator of the
Enterprises—rather than, as the district court concluded, an
improper exercise of its power as a regulator. If the PACE
directive falls within FHFA’s conservator powers, it is
insulated from review and this case must be dismissed.
Conversely, the anti-judicial review provision is inapplicable
when FHFA acts beyond the scope of its conservator power.
See Sharpe v. FDIC, 126 F.3d 1147, 1155 (9th Cir. 1997)
(holding that statutory bar on judicial review of the Federal
Deposit Insurance Corporation’s actions taken as conservator
or receiver “does not bar injunctive relief when the FDIC has
acted beyond, or contrary to, its statutorily prescribed,
constitutionally permitted, powers or functions.” (internal
quotation marks omitted)).

     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 (2d Cir. 2012), the Second
Circuit held that courts were precluded by section 4617(f)
from adjudicating certain claims including, among others,
that FHFA violated the APA by failing to engage in formal
rulemaking before issuing the same directive we address in
this case. 699 F.3d at 225–28. The Eleventh Circuit followed
in Leon County, Florida v. FHFA, 700 F.3d 1273 (11th Cir.
2012), holding that the July 6, 2010, “directive not to
purchase PACE-encumbered mortgages was within the
FHFA’s broad powers as a conservator,” and therefore placed
beyond the scope of the courts’ review by section 4617(f).3
700 F.3d at 1279.

  3
    The district court lacked the benefit of the Second and Eleventh
Circuits’ analyses when it issued both its preliminary injunction and the
judgment that FHFA now appeals.
               COUNTY OF SONOMA V. FHFA                       13

     We agree. As conservator, FHFA has “all the rights,
titles, powers and privileges of the [Enterprises].” 12 U.S.C.
§ 4617(b)(2)(A)(i). HERA permits FHFA to take actions that
are “appropriate to carry on the business of the [Enterprises]
and preserve and conserve the assets and property of the
[Enterprises].” 12 U.S.C. § 4617(b)(2)(D)(ii). FHFA can, as
conservator, take over the Enterprises and operate them with
all the powers of the shareholders, directors, and officers of
the Enterprises, and conduct all business of the Enterprises.
Id. § 4617(b)(2)(B)(i). Further, under its operating powers,
FHFA also has the power to “preserve and conserve the assets
and property of the [Enterprises].” Id. § 4617(b)(2)(B)(iv).

    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].” 12 U.S.C. § 4617(b)(2)(D)(ii).
The Enterprises’ business is to purchase and securitize
mortgages, and FHFA carries on that business when it weighs
the relative risks and benefits of purchasing classes of
mortgages for investment. When FHFA decides not to
purchase a class of mortgages that it believes pose excessive
risk, it is attempting to preserve and conserve the Enterprises’
assets and property. Indeed, careful management of its
mortgage purchase decisions appears to be the only way
FHFA can avoid the financial problems which precipitated
the Enterprises’ conservatorship. Although FHFA’s powers
as conservator are not limitless, the ability to decide which
mortgages to buy is an inherent component of FHFA’s charge
to preserve and conserve the Enterprises’ assets. See Leon
Cnty., 700 F.3d at 1279 (“It is fully within the responsibilities
of a protective conservator, acting as a prudent business
manager, to decline to purchase a mortgage when its lien will
be relegated to an inferior position for payment.”); see also
14             COUNTY OF SONOMA V. FHFA

Sahni v. Am. Diversified Partners, 83 F.3d 1054, 1059 (9th
Cir. 1996) (holding that the FDIC acted “well within its broad
statutory powers as receiver” when it sold limited
partnerships in which an insolvent bank had an interest, and
its actions were therefore insulated from judicial review by a
statutory restriction analogous to 12 U.S.C. § 4617(f)).

     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 remains after the superior
PACE lien is paid, making it less likely that the mortgage-
holder—here, the Enterprises whose assets FHFA is tasked
with protecting—will be able to recover its investment. As
FHFA observes, PACE liens need not be superior to home
mortgages; other states have authorized PACE liens that are
subordinate to mortgages and thus do not jeopardize the
Enterprises’ assets. See, e.g., Vt. Stat. Ann. tit. 24, § 3255.
That these subordinate PACE liens are unaffected by FHFA’s
directive is additional evidence that it was animated by a
concern for the soundness of the Enterprises’ assets.

     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
                COUNTY OF SONOMA V. FHFA                         15

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
16             COUNTY OF SONOMA V. FHFA

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. Because we
dismiss this case for lack of jurisdiction, we do not address
FHFA’s alternative contention, that the district court erred on
the merits in its determination that the APA applied to
FHFA’s directive. Accordingly, we VACATE the district
court’s order and DISMISS this case.