The megabillions tax claims facing Fannie Mae and Freddie Mac

August 1, 2012

We all know that the foreclosure crisis has been a disaster for state and county governments. When homeowners lose their houses, they stop paying property taxes, which is one of the reasons why municipal governments have been driven to consider ideas like seizing underwater mortgages through the use of eminent domain. We’ve also seen state and local officials file lawsuits against the Mortgage Electronic Registration Systems, claiming that MERS and its member banks have cheated governments out of mortgage recording fees in the securitization process. MERS has had mixed results in shutting down those cases but so far hasn’t been found liable.

There’s another tranche of litigation that’s gotten much less attention but could result in billions of dollars for state and county governments, courtesy of Fannie Mae and Freddie Mac, the government-sponsored mortgage guarantors that have taken ownership of thousands and thousands of foreclosed homes. The Judicial Panel on Multidistrict Litigation is weighing a motion to consolidate 23 suits from around the country that claim Fannie and Freddie owe real estate transfer taxes on foreclosed homes they resold. The total exposure for Fannie and Freddie, which are now in federal conservatorship, hasn’t been publicly tabulated, but in the two cases that sparked the MDL motion, the Michigan attorney general and the county government of Oakland, Michigan, claimed that Fannie and Freddie owe millions in transfer taxes just to Oakland County. Class actions already on the dockets have asserted claims on behalf of 13 states, but according to a consolidation motion filed by Genesee County, Michigan, 35 states have real estate transfer tax statutes that could be asserted against Fannie and Freddie. I’d be surprised if most of them (including California and Nevada, which haven’t yet brought cases) don’t end up filing claims.

Fannie and Freddie, which are represented at the JPMDL by King & SpaldingFoley & Lardner and Arnold & Porter, argued in the Michigan litigation that they are exempt from all state taxes by the federal charters that created them. But in a summary judgment ruling in March, U.S. District Judge Victoria Roberts of Detroit said the transfer tax is an excise fee that’s not covered by the charter exemption. She also said Fannie and Freddie are not “federal instrumentalities,” so they’re not shielded by a Michigan law exempting government entities from taxation. The judge granted the county and state summary judgment on Fannie and Freddie’s excise tax liability. (Lawyers for Fannie and Freddie have asked the 6th Circuit Court of Appeals to take an interlocutory appeal of the ruling.)

It’s easy to see why Fannie and Freddie oppose consolidation of the transfer tax cases – especially because Genesee County’s lawyers suggested that the MDL panel move all of the cases to federal court in Detroit, where the mortgage guarantors’ liability has already been decided. Fannie and Freddie called the motion “a brazen attempt to forum shop,” but also said that even if they lose on the threshold issue of their exemption from transfer taxes, their liability depends on state and local statutes.

No plaintiffs’ firm dominates the transfer tax litigation, although Hausfeld represents counties in Ohio and West Virginia in class actions asserting statewide claims. I left a message for Genesee County counsel Jason Thompson of Sommers Schwartz but didn’t hear back. Fannie Mae counsel Jill Nicholson of Foley referred me to Michael Johnson of A&P, who didn’t immediately get back to me. Freddie Mac’s lawyer, Michael Ciatti of K&S, didn’t return my call.

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