Fannie Mae and Freddie Mac Not Exempt From State/Local Real Estate Transfer Taxes

In a decision that could have extensive implications for the entire mortgage industry, a federal judge in Michigan ruled that Fannie Mae and Freddie Mac are not exempt from paying local and state real estate transfer taxes. The two mortgage giants have claimed exemptions from these taxes based on certain federal statutes that grant them relief from “all taxation.” In Oakland County v. Federal Housing Finance Agency, No. 11-12666 (E.D. MI., March 23, 2012), U.S. District Court Judge Victoria A. Roberts rejected these claims and granted summary judgment in favor of the plaintiffs holding that the statutory exemptions from “all taxation” does not include excise taxes, such as real estate transfer taxes.

The Court, citing to United States v. Wells Fargo Bank, 485 U.S. 351 (1988), explained that “‘all taxation’ had an understood meaning, and that it applied only to direct taxes, not excise taxes.” The Court added that the “Supreme Court in Wells Fargo made clear that where a statute prohibits the collection of ‘all taxation,’ an excise tax is still due.” In Oakland, there was no dispute that the real estate transfer taxes were considered excise taxes. The Court, therefore, concluded that “Wells Fargo dictates that the Defendant's exemptions do not cover the Transfer Taxes,” and that Fannie Mae and Freddie Mac “are liable for the Transfer Taxes.” The damages in the Oakland case are estimated to be $13.5 million.

The ruling, the first of its kind involving Fannie Mae’s and Freddie Mac’s refusal to pay local/state transfer taxes, is expected to be appealed given the far-reaching implications of the decision. Not only are Fannie Mae and Freddie Mac facing millions of dollars of damages in the Oakland case, but there are two pending class actions based on nearly identical claims that involve every Michigan county and the state. Attorneys for the State of Michigan estimate the State’s damages to be between $50 and $100 million in these lawsuits. Counties in Michigan have also started requiring Fannie Mae and Freddie Mac to pay all transfer taxes or they won’t transfer the deeds on those properties. Ingham County Register of Deeds Cutris Hertel Jr. explained, "[w]e've been telling them along the way they need to pay on these, but we haven't had the legal backing until the Oakland County case was decided."

Beyond Michigan, this decision will likely embolden other counties and states to sue Fannie Mae, Freddie Mac, and other entities for unpaid real estate transfer taxes. This is particularly true in the current economic climate where state and local governments are looking for ways to boost revenues to solve significant budget shortfalls.  

Should you have any questions about this ruling or need additional information, please contact K.J. Miller or Jeffrey Jamison, co-authors of this alert, at 734-214-7678 or 312-627-2101, respectively.

For more information about Dykema’s Consumer Financial Services practice, please contact Richard Gottlieb, Leader of Dykema's Financial Industry Group, at 312-627-2196, Donald Lampe, Leader of the Firm's Financial Services Regulatory and Compliance practice at 704-335-2736, or any of the listed attorneys. 

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