More fallout from Fannie Mae and Freddie Mac’s opposition to Property Assessed Clean Energy:

California pulled funding for its home solar and energy-retrofit loans yesterday in response to federal mortgage overseers’ negative ruling on the program.

The California Energy Commission’s (CEC) decision removes $30 million in federal stimulus funds awarded by the state last February to five counties for county and municipal home energy loans. The state said the five were expected to create 4,400 jobs and avoid 187,000 tons of greenhouse gas emissions through 2012.

Meanwhile, the Sierra Club joined California’s attorney general and Sonoma County, Calif., (home of the largest active PACE program) in suing Fannie and Freddie.

Let’s step back for a moment: PACE was designed to make up for a failure of Congress to lead on clean energy and a failure of financial markets to help homeowners invest in energy-efficiency retrofits and rooftop solar panels, which earn back their price tag (and more) over time but have prohibitive up-front costs. Then two bailed-out institutions at the center of the broken financial system put a stop to the solution, despite generous responses to their concerns and indications that well-designed PACE programs are fiscally prudent for homeowners and lenders alike. How nice of them.

On the bright side, the conflict has generated a lot of media attention (NPR, New York Times, Wall Street Journal, San Francisco Chronicle, American Prospect) for a new and somewhat hard-to-understand tool that could ultimately help millions of Americans save both money and energy. When Fannie and Freddie get straightened out, that exposure could help PACE grow even faster.