Milwaukee County could miss out on at least $200,000 in real estate transfer returns if a federal lawsuit turns in favor of Fannie Mae and Freddie Mac.
These transfer returns, often called transfer taxes, are paid when a property is sold. In Milwaukee County, the taxes are calculated at a rate of $3 for every $1,000 of a property’s value and are paid to the county’s register of deeds. The county keeps 20 percent of those taxes and sends the rest to the state Department of Revenue.
Congress established Fannie Mae, formally known as the Federal National Mortgage Association, in 1938 and Freddie Mac, formally known as the Federal Home Loan Mortgage Corp., in 1970. They buy mortgages from smaller lenders to free up capital so those lenders can continue to grant loans.
But Fannie Mae and Freddie Mac long have claimed to be federal entities and therefore exempt from taxation, including transfer taxes, levied by counties.
That claim is being challenged in a Michigan federal court in a lawsuit Milwaukee County wants to use as a model in filing its own lawsuit.
Genesee County (Mich.) filed a class-action lawsuit on behalf of 83 Michigan counties, with only Macomb and Oakland counties opting out. Oakland County already filed its own lawsuit.
In a summary judgment filed March 23, U.S. District Judge Victoria Roberts of Michigan’s eastern division ruled Fannie Mae and Freddie Mac are not federal entities, but private ones backed by the federal government, a distinction based on their status as publicly traded companies.
Beyond that, Roberts noted, the language exempting federal entities from taxation is interpreted to mean direct taxation only. Transfer taxes only are assessed and collected when real estate changes ownership, which amounts to an excise tax.
For those reasons, Roberts found Fannie Mae, Freddie Mac and their overseer, the Federal Housing Finance Agency, “unambiguously liable” for transfer taxes in Michigan, according to the judgment.
The enterprises already are seeking a second opinion.
“She said, ‘I agree with Oakland County and Genesee County that Fannie and Freddie are not exempt and should pay the tax,’” said William Horton, the attorney from Troy, Mich.-based Giarcomo, Mullins and Horton PC, who served as lead counsel for the Michigan counties.
He compared Fannie Mae and Freddie Mac with “the biggest fish” in a food chain. If a mortgage originates at a credit union, he said, it might be “eaten” by a few more fish before it reaches Fannie Mae, which tends to handle single-family homes, or Freddie Mac, which tends to handle multifamily residences.
Horton said questions about Fannie and Freddie transfer taxes only recently arose because mortgages the enterprises buy are entering foreclosure at a faster rate than in the past due to the economic downturn. That has left the enterprises with unoccupied properties that they then must sell.
The Michigan lawsuit prompted similar filings in Florida and Illinois, and Milwaukee County is preparing to file.
“Everyone else in the country is becoming aware of this and is jumping on,” said John La Fave, Milwaukee County’s register of deeds.
La Fave said he was not aware Fannie Mae and Freddie Mac might not be exempt from paying the transfer taxes until the county was approached by Milwaukee-based Hansen Riederer Dickinson Crueger & Reynolds LLC, which proposed filing the lawsuit.
Milwaukee County’s Board of Supervisors in June approved filing that lawsuit. Milwaukee County Executive Chris Abele must sign that approval by the board’s July 26 meeting before the firm can be retained.
La Fave said he has heard interest from a handful of other counties’ registers of deeds so far, but was confident that Milwaukee County would move forward with a lawsuit even if no other counties join the lawsuit.
“All it takes is one county, Milwaukee County, to lead the way,” he said.
Because Fannie Mae and Freddie Mac were believed to be exempt, the transfer taxes were not calculated on their properties sold in the county. La Fave said the county had no clear figure on how much it could have collected.
In order to put a price tag on those transactions, La Fave’s office conducted a sample study of Fannie Mae or Freddie Mac sales during a two-month period. Once those properties were identified, mortgages taken out by the purchasers were examined to approximate what the properties could have been worth at the time of sale.
La Fave’s office then was able to estimate how much it might have received in transfer taxes during the past six years, the statute of limitations on collecting the taxes.
According to his office’s latest calculations, La Fave said the 20 percent the county could have received is at least $200,000.
La Fave said the overall figure Fannie Mae and Freddie Mac could be found liable for in Wisconsin could be much higher if a class-action lawsuit is successful.
In the Michigan case, Fannie Mae and Freddie Mac have filed an interlocutory appeal, which is brought before the case is finalized. Although Roberts decided in favor of the Michigan counties, the case is not finalized because damages have not been determined.
“They don’t have a right to appeal yet,” Horton said, adding that the right of appeal is inherent only after a case is finalized. “They have to ask permission.”
An interlocutory appeal can be granted if the reason for appeal is a question of law rather than one involving the specific facts of a case, if a different judge reasonably could have found in favor of the party the original judge found against and if appealing before the case is finalized would “materially advance” the end of litigation. Fannie Mae and Freddie Mac argued their situation meets all three requirements, and Roberts agreed.
But there is no guarantee the higher court will agree to hear it.
“We’re waiting for the 6th Circuit Court of Appeals in Cincinnati to make a decision,” Horton said.
Horton said Cincinnati’s decision, if the court chooses to take the case, could affect the success of a lawsuit brought by Milwaukee County.
If the Cincinnati court were to agree with the Michigan ruling, that probably would influence any decision in Wisconsin, Horton said. But since Wisconsin falls under the 7th Circuit rather than the 6th, it wouldn’t necessarily force a Wisconsin judge’s hand.
“If the 6th circuit doesn’t agree with me, same thing,” Horton said. “It could be persuasive but not binding.”