The Town of Babylon v. Fed. Hous. Finance Agency

• Decision Date: 13 June 2011
• Docket Number: No. CV 10–4916.,CV 10–4916.
• Parties: The TOWN OF BABYLON, Plaintiff,v.FEDERAL HOUSING FINANCE AGENCY, Edward Demarco, in his capacity as Acting Director of the Federal Housing Finance Agency, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Office of the Comptroller of the Currency, A Component of the United States Department of the Treasury, and John G. Walsh, Acting Comptroller of the Currency, Defendants.
• Court: U.S. District Court — Eastern District of New York

790 F.Supp.2d 47

The TOWN OF BABYLON, Plaintiff,

v.FEDERAL HOUSING FINANCE AGENCY, Edward Demarco, in his capacity as Acting Director of the Federal Housing Finance Agency, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Office of the Comptroller of the Currency, A Component of the United States Department of the Treasury, and John G. Walsh, Acting Comptroller of the Currency, Defendants.

No. CV 10–4916.

United States District Court, E.D. New York.

June 13, 2011.

Goldberg & Connolly, by Erik Ortman, Esq., William James Tinsley, Jr., Esq., Rockville Centre, NY, for Plaintiff.Arnold & Porter, by Howard N. Cayne, Esq., Asim Varma, Esq., New York, NY, for Defendants Federal Housing Finance Agency and Federal National Mortgage Association.Loretta E. Lynch, United States Attorney, Eastern District of New York, by Thomas A. McFarland, Esq., Central Islip, NY, for Defendants Office of the Comptroller of the United States Department of the Treasury, and John G. Walsh.

MEMORANDUM AND ORDER

WEXLER, District Judge.

This is an action commenced by the Town of Babylon, New York (“Babylon” or the “Town”) alleging that Defendants' actions with respect to the effect of a certain home improvement financing program on mortgage liens violate Federal and New York State Law. In particular, Defendants are alleged to have: (1) promulgated rules in violation of the Administrative Procedure Act, 5 U.S.C. §§ 701–706 (the “APA”); (2) violated the National Environmental Policy Act, 42 U.S.C. § 4332 (“NEPA”), by failing to conduct the required environmental impact analysis; (3) violated the Tenth Amendment to the United States Constitution by regulating, inter alia, local government and special assessments, and (4) tortiously interfered with contractual relationships between the Town and its residential homeowners, and local contractors.

Plaintiff seeks a declaratory judgment that Defendants have violated the above-referenced laws, and an order requiring Defendants to vacate and set aside all directives alleged to have been issued in furtherance of those violations. Presently before the court are Defendants' motions, Pursuant to Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the complaint.

BACKGROUND

I. The Parties

As noted, Plaintiff is the Town of Babylon. Plaintiff names as Defendants various federal entities, each of which is involved in the regulation of banking and/or the purchase and guarantee of home mortgages. Specifically, Defendants are: (1) the Office of the Comptroller of the United States Treasury (the “OCC”); (2) the Federal National Mortgage Association (“Fannie Mae”); (3) the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and (4) the Federal Housing Financing Agency (“FHFA”). Each of these entities, and the role they play in the housing market in the United States, are discussed below.

A. OCC

Defendant OCC is a bureau of the United States Department of the Treasury that acts as the primary supervisor of federally chartered banks. OCC has the statutory obligation to “prescribe rules and regulations to carry out the responsibilities of the office.” 12 U.S.C. § 93a. As such, it oversees a broad spectrum of bank activities, all aimed at ensuring that the interests of bank depositors and the public are protected. Pursuant to the National Bank Act and the Federal Deposit Insurance Act, OCC issues directives setting forth standards of safe and sound banking procedures. See generally 12 U.S.C § 1831p–1(a)–(c). In particular, OCC issues guidelines with respect to credit underwriting practices that consider the value of collateral underlying bank loans.

In furtherance of its statutory duties, OCC has to power to issue informal recommendations and to institute formal enforcement actions in the form of administrative proceedings. In the course of such proceedings, OCC can serve notice of charges, as well as temporary cease and desist orders. The latter action requires immediate compliance by the institution to which to order is issued.

B. Fannie Mae and Freddie Mac

Defendants Fannie Mae and Freddie Mac are federally chartered private corporations that are commonly referred to as “Government Sponsored Enterprises “(GSE's”).” Fannie Mae and Freddie Mac are in the business of, inter alia, purchasing home loans from banks and other lenders. Fannie Mae and Freddie Mac own or guarantee the majority of residential home mortgages in the United States, and the combined debt and mortgage related assets of these GSE's are valued at more than $6 trillion. The position held in the home mortgage business by Fannie Mae and Freddie Mac make them the dominant force in that market. Indeed, Congress has found that these GSE's serve an important public function and their “continued ability ... to accomplish their public missions is important to providing housing in the United States and the health of the Nation's economy.” 12 U.S.C. § 4501(2). Thus, it is not a stretch to assume that lenders in the home financing market are guided in their decisions by Fannie Mae and Freddie Mac requirements. They are likely to give important consideration to GSE lending guidelines, and will be less likely to offer mortgages that do not conform thereto.

C. FHFA

The FHFA is an agency independent of the Federal government that is charged with general supervisory and regulatory authority over, inter alia, Fannie Mae and Freddie Mac. 12 U.S.C. § 4511(b). FHFA was created pursuant to the Housing and Economic Recovery Act of 2008 (“HERA”). In September of 2008, FHFA became the conservator of both Fannie Mae and Freddie Mac. The conservatorships were precipitated by the economic crisis that followed the collapse in the housing market, and the concomitant drop in the value of assets held by the GSE's.

In its capacity as the federal regulator and conservator of Fannie Mae and Freddie Mac, FHFA's duties are broadly defined to include ensuring that:

(1) the GSE's operate in a safe and sound manner, and maintain adequate capital and internal controls;

(2) the GSE's foster “liquid, efficient, competitive, and resilient national housing finance markets....”

(3) the GSE's comply with the rules, regulations, guidelines, and orders issued;

(4) the GSE's carry out their “statutory mission only through activities that are authorized under and consistent with this chapter and the authorizing statutes; and

(5) “the activities of each [GSE] and the manner in which such [GSE] is operated are consistent with the public interest.”

12 U.S.C. § 4513(a)(1)(B). The Director of the FHFA is charged with the duty to establish various standards for the GSE's, including those with respect to the management of market risk, overall risk management processes, and “such other operational and management standards as the Director determines to be appropriate.” 12 U.S.C. § 4513b(a).

In its capacity as a conservator, FHFA is charged by statute with the responsibility of, inter alia, identifying and minimizing further financial risk to the GSE's to ensure their future economic safety and viability. See 12 U.S.C. § 4501(8) (noting importance of ensuring financial safety and soundness of GSE's). As conservator for Fannie Mae and Freddie Mac, FHFA is similarly empowered to take action: (1) necessary to put these GSE's “in a sound and solvent condition,” and (2) “appropriate to carry on the business of the [GSE's] and preserve and conserve [their] assets and property.” 12 U.S.C. § 4617(b)(2)(D). Additionally, as conservator, FHFA is broadly entitled to “take any action authorized by [the federal banking statute], which [it] determines is in the best interests of the [GSE's] or the FHFA.” 12 U.S.C. § 4617(b)(2)(J)(ii).

Congress has specifically limited the power of courts to review the actions of the FHFA when acting as a conservator. Thus, it has provided that “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.” 12 U.S.C. § 4617(f). While the Director of the FHFA may apply for court enforcement for enforcement of its notices or orders, the court to which such action is addressed may not, except as specifically provided by statute “review, modify, suspend, terminate, or set aside any such notice or order.” 12 U.S.C. § 4635(b).

II. The Town's “PACE” Program

In 2008, the Town created a program known as the Long Island Green Homes Program (“LIGH” or the “Program”). The Program seeks to encourage homeowners within the Town to undertake home improvements that reduce energy consumption, promote clean energy, create local jobs, reduce greenhouse gas emissions, and mitigate climate change effects. Programs similar to LIGH exist in a variety of jurisdictions across the country, and are generally referred to as “Property Assessed Clean Energy Programs (“PACE” programs).”

A key component of PACE programs such as the one in effect in Babylon is the financing of “green” home improvements by the Town. Re-payment of such Town financing is secured by assessments made on the improved property in the financed amount. In Babylon, the financed amount constitutes a first priority lien on the property. In the event that the property is sold, the debt incurred under the PACE program is transferable to the new homeowner. Babylon asserts, and the court accepts for the purpose of this motion, that the typical cost of a PACE improvement is less that $9,000, and that reduced energy costs typically exceed the homeowners' monthly repayment obligations, which average less that $92. Babylon further asserts that there has never been a single default on a PACE financed repayment obligation.

III. Defendants' Actions With Respect to PACE Programs

At the core of Babylon's complaint are Defendants' actions in response to the priority position of liens created under its PACE program, vis a vis mortgage liens. On May 5, 2010, Fannie Mae issued a “Lender Letter,” regarding concerns over...