A dispute between federal mortgage authorities and representatives of California’s energy financing programs has lawyers preparing for a showdown in federal court.

The conflict at hand involves a July declaration by the Federal Housing Finance Agency regarding state- and local-level programming.

PACE stands for Property Assessed Clean Energy, and provides funding for energy saving capital improvement programs. Funds made available from these programs are repaid by assessed charges on the homeowner’s property tax bill.

More than 100 cities and a dozen counties, representing an estimated 12 percent of the state’s population, had been poised to participate in an ambitious PACE program called CaliforniaFIRST.

The future of these programs was thrown into doubt by the FHFA after it issued a cautionary note in July.

On July 6, the federal agency issued a statement warning municipalities about PACE.

FHFA, which oversees the largest mortgage buyers nicknamed Fannie Mae and Freddie Mac, was concerned about future repayment of the PACE funds in the event of default.

The California Energy Commission then cancelled its plan to provide funding to PACE programs by using $30 million in Federal Stimulus funds. This decision forced programs like CaliforniaFIRST and Palm Desert’s Energy Independence to be suspended.

The State of California and individual municipalities then sued the FHFA for interfering with plans to fund of energy-saving home improvements.

“It’s ironic that the city has to sue the federal government to remove an impediment to energy efficiency and conservation – when that is a central part of the Department of Energy’s policy,” said Palm Desert Mayor Cindy Finerty.

The city of Palm Desert became the newest plaintiff in the lawsuit filed suit against the Federal Housing Finance Agency. It is a complicated case that involves multiple municipalities, environmental groups, and states ranging from California to New York and Florida.

“The early indications are… that the court would like to see this matter resolved promptly,” said Janill Richards, supervising deputy attorney general for California.

The federal housing authorities filed a motion to consolidate the multiple lawsuits into one case. A case management conference is scheduled for Nov. 2 in U.S. District Court in San Francisco before Judge Claudia Wilken.

One issue is the location for a potential trial. “The federal defendants said the first choice would be California and the second choice would be Washington, D.C.,” said Richards.

Another issue before the court is whether PACE funding is repaid as a loan or as a tax assessment. PACE liens often have a 20-year amortization and are included on a homeowner’s property tax bill. The attorney general’s complaint says that under California law, liens resulting from PACE assessments take priority over mortgages.

“Certainly if the Federal Housing Finance Agency were to propose some reasonable resolution that would allow PACE to proceed, we would give it serious consideration,” said Richards.

Placer County may also join in the suit, said Richards. In March, the county launched a PACE program called mPower Placer, but suspended it four months later as a result of the FHFA directive. There’s a note on its website saying mPower Placer can no longer accept residential applications.

In a letter to the FHFA protesting the federal directive, Placer County Treasurer-Tax Collector Jenine Windeshausen detailed the care that went into designing mPower Placer. The program included fiscal safeguards designed to reduce the risk of default by ensuring participants were in good financial standing.

Placer started its program after the Sonoma County’s pioneering PACE program in early 2009. It has resulted in impressive energy improvements and job creation.

In July, Sonoma County responded to the FHFA directive by thumbing its nose at the feds – the Board of Supervisors voted to continue accepting applications. Two weeks later, the county sued the FHFA for threatening to cripple an innovative and secure way for property owners to make improvements that would reduce greenhouse gases and conserve water.

Sonoma County Energy Independence Program is still receiving applications, but at a slower rate than before. During the summer, most weeks saw between 10 and 20 applications filed with Sonoma’s PACE program.

In roughly 18 months of the program, Sonoma County has funded more than $45 million in energy improvements.

None of those projects have resulted in a foreclosure. That puts to the test the FHFA concern, said Jim Leddy, community and governmental affairs manager for Sonoma County.

While PACE proponents scrutinize developments in federal court, Congress may have a fix as well.

Bills to restore PACE and overcome the FHFA objections have been introduced in the House and the Senate with bipartisan sponsorship from members of the California delegation.