Tax Victories for Fannie and Freddie May Be Good News for Servicers

Thumbnail for 1392The future of the Government Sponsored Enterprises might be uncertain, but one aspect of their existence is becoming more clear: courts have repeatedly ruled that Fannie Mae and Freddie Mac are exempt from real property transfer taxes.  And those decisions likely benefit servicers too.

The cases deal with the exemptions Congress gave Fannie and Freddie from most state and local taxes.  The plaintiffs – often county governments, but also several state governments and qui tam plaintiffs – have filed dozens of lawsuits against Fannie and Freddie seeking payment of transfer taxes (which are generally due when real property is transferred) on the theory that the GSEs are not exempt from transfer taxes.

The suits have gone nowhere.  On January 27, 2014, the Fourth Circuit became the third federal appellate court to reject the plaintiffs’ position, in Montgomery County, Maryland v. Federal National Mortgage Association, a consolidated appeal from the dismissal of suits filed by one Maryland county and two South Carolina counties.  Congress exempted the GSEs from all taxes except taxes on real property, but transfer taxes are not taxes on real property, the Fourth Circuit concluded.  They are taxes on the transfer of property, a distinction that doomed the plaintiffs’ case.  The Court also rejected the plaintiffs’ argument that the tax exemption is unconstitutional.

The Fourth Circuit joins recent Seventh Circuit (DeKalb County v. Federal Housing Finance Agency) and Sixth Circuit (County of Oakland v. Federal Housing Finance Agency) decisions in holding that Fannie and Freddie are exempt from transfer taxes.  More than two dozen district courts have ruled the same way.  As far as we’re aware, only one district court has gone the other way—and it was reversed by the Sixth Circuit.  (Cases are still pending in other circuits.  The Supreme Court denied petitions for certiorari by the plaintiffs in the Sixth Circuit case, and Supreme Court review in another case is less likely if the circuit courts keep ruling the same way.)

The rulings for Fannie and Freddie may also be good news for servicers who transfer foreclosed property to the GSEs.  Based on Supreme Court precedent addressing similar statutes, the GSEs have argued that their counterparties in property transactions are also exempt from transfer taxes.   (See page 10 of this brief in a Michigan case.)   If the GSEs are correct, then it doesn’t matter whether a transfer tax falls on one of the GSEs or on a counterparty; federal law bars the tax.

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