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FHFA Wants Money Transferred from Local Government to Bondholders

posted by Adam Levitin

FHFA has sued the State of Illinois and some local government units claiming that Fannie Mae and Freddie Mac are exempt from state and local real estate transfer taxes. FHFA's argument is basically that the GSEs are subject only to non-discriminatory real estate taxes and real estate transfer taxes aren't real estate taxes.  

Zhuuuuuup.  Yes, that's the sound of my eyes rolling. This is what FHFA is spending time and effort on as conservator? What's particularly aggrevating about this litigation is the incredible short-sightedness of FHFA as conservator, a problem we've seen previously, most notably in regard to principal reduction modifications. FHFA seems to understand its role as conservator in the most narrow of senses--maximizing the GSEs' assets in the short term.

Perhaps this is what we should expect when we have a career civil servant, rather than a politically accountable appointee running FHFA, but one would hope that anyone running FHFA would understand that the GSEs exist first and foremost for the national benefit--hence their special federal charters--and that they should be serving national policy interests, rather than pursuing a narrow, thrifty conservatorship. That the Obama Administration hasn't put a strong hand in the whip seat at FHFA continues to amaze me. But it is in keeping with the Adminsitration's abdication of housing policy in general. (If you doubt that, tell me what is US housing policy today and who is making it?) 

There can be reasonable debates about what those national policy interests are, I don't think that the FHFA's actions are intended to be a stand on those issues. Still, it's worthwhile pointing out what the FHFA is functionally arguing should be policy:  the FHFA is arguing for a transfer of wealth from state and local government to private entities that are currently receiving economic support from the US government. That transfer helps reduce the GSEs' need for federal government support, but ultimately this is all being done for the benefit of the GSEs' bondholders and MBS holders.

Is that really the transfer we want to see? Is that Congressional policy? State and local governments are scrapping for every penny they can find, and FHFA is demanding that Fannie and Freddie be excused from non-discriminatory real estate transfer taxes so that those funds can go to the GSEs' bondholders and MBS holders. 

The irony here is that even if the GSEs lose the litigation and pay Illinois, they might still be evading paying millions of dollars of state and local taxes due by operation of their servicing guidelines.  The GSEs claim that when a loan defaults, the property is automatically transferred to the servicer, so that the servicer can foreclose in its own name (and Fannie and Freddie's names never appear, which would be bad for P.R.). It's not clear how this automatic transfer actually works--I don't know of any legal mechanism that blesses it, but maybe it can be brought into the scope of UCC Article 9 (other than in South Carolina).  Irrepsective, in title theory states, the transfer might consistute a transfer of real estate, and thus be subject to taxation, even if the GSEs don't record a deed. If I'm right on this, there could be a lot more tax liability for the GSEs coming out of foreclosures.

Finally, let's also recognize the effect of a GSE tax exemption on foreclosures. If the GSEs prevail, it will encourage foreclosures, by reducing their cost. Perhaps this results in lower costs of mortgage credit/greater credit availability, but it could just result in a larger spread being pocketed by the GSEs and the banks that sell to them. In any event, there is something incredibly unseemly about FHFA pushing for easier foreclosure. If the Administration had a coordinated housing policy (heck, any housing policy), it might rethink that. 



Actually Adam, there is a large predatory industry out there of HOA management companies and some developers that have been preying upon homeowners for quite some time. The FHFA adopted new rules effective July 16, 2012 that the GSEs are not to invest in any notes for which the security is real estate burdened by transfer fees.

What has been going on is that when the homeowner tries to sell the property, the management company or developer demand that the homeowner pay a fee to the management company or some other entity that has little to do with the property. The homeowner receives nothing of value. No services are provided. The homeowner did not contract with the management company nor the recipient of the fees for any services. This is an absolute windfall fee for HOA management companies and some developers - the residual income into perpetuity rent seeking off of homeowners that cannot sell their homes unless they pay these entities.

Illinois realtors were actually falsely advertising that transfer fees have been abolished. In fact, that was not the case at all. The act lobbied for by the HOA industry, Realtors, and American Land Title Association is actually an ENABLING act for these transfer fees that they advertise as having been eliminated. The act actually purports to enable these fees to be charged and proclaims them not to be transfer fees. However, the fees have no bearing to any costs or services. They are usually a fixed price or a percentage of the sales price of the home. The homeowner gets nothing. You'll find this type of transfer fee only on HOA-burdened property.

see, http://www.illinoisrealtor.org/transferfeecovenant

also see, August 16, 2010 Notice of Proposed Guidance on Private Transfer Fee Covenants

Skip the New York "flip tax" comments. All the other comments are from employees or owners of management companies or employees of various developers. They misrepresent their interests in these things and like to claim homeowners "chose" this. The Associations, Inc. letter is about as deceptive as it is lengthy. That letter was specifically addressed in FHFA's final rule effective July 16, 2012. You will note that the FHFA did not support Associations, Inc. (aka "Associa") claim that these fees paid to rent seekers (like Associa management companies) somehow benefit the homeowners or the property. The FHFA made it very clear that the GSEs cannot invest in loans secured by real property burdened by transfer fees with the small exception of unless the fee benefits the real property. Clearly fees paid to HOA management companies do not.

The Illinois fee appears to have a similar problem.

There is another issue that I have been puzzling over that is somewhat related... Bank of America is working out a loan modification on my mortgage (I live in Texas). BoA originated the loan nine years ago, and presently acts as the servicer. I assume that the loan is owned by Fannie Mae. Any time I talk to BoA, they have to give me the "Miranda" song-and-dance: We are attempting to collect a loan, and any information you provide, etc etc.

Your statement that "The GSEs claim that when a loan defaults, the property is automatically transferred to the servicer, so that the servicer can foreclose in its own name (and Fannie and Freddie's names never appear, which would be bad for P.R.)" does not agree with what I am dealing with. My loan is defaulted, yet BoA is acting like a third party debt collector. Am I missing something?

"one would hope that anyone running FHFA would understand that the GSEs exist first and foremost for the national benefit--hence their special federal charters--and that they should be serving national policy interests, rather than pursuing a narrow, thrifty conservatorship."

I am not aware of any objective basis that makes your policy preference a fact that "anyone" should "understand". It seems more like a postulate that one endorses or opposes. In contrast, I think the conservation of the fisc is itself a national policy interest. Every dollar the GSEs lose has to be made up from the fisc. I suspect if you polled the public as to whether the GSE conservator should leave money on the table or minimize the deficit, you'd find a lot of people who would "understand" the deficit reduction to be its job.

A subtler analysis might be that there are competing interest and, once the GSEs became insolvent, the pre-insolvency policy objective became subordinate to the fiscal protection objective.

I'm with MT on this one. There is no agency with an organic statute that reads: "Do good." It's inherent in the word "agency." Agents act with their principal's interests in mind, as articulated by the principal. In a rule-of-law republic, the principal articulates its interests in legislation. You don't have to be Nino Scalia to be skeptical about the spiritualist mode of statutory interpretation.

@ IC_deLight--I'm not sure what HOA fees have to do with this. This is about whether the GSEs are subject to legitimate state taxes. The HOA fee issue seems to be about whether the HOA fees are legitimate, not whether they would then apply to the GSEs.

@mt--I disagree with your basic assumption, which is that every dollar the GSEs lose has to be made up from the fisc. It doesn't. We don't have to support the GSEs, and we certainly don't have to support them so that their bondholders and MBS holders are unimpaired. I've got no beef with supporting the GSEs--they are needed for the housing market not to collapse, but we continue to bailout GSE bondholders and MBS holders, when what is important is supporting the on-going GSE operations, not protecting their pre-conservatorship creditors.

As long as the federal government is supporting the GSEs, FHFA evasion of state taxes effects a state to federal transfer. Given that most transfers are federal to state, this is kind of strange. I suspect few people particularly care if their taxes go into the federal or state fisc, and I recognize lower losses for the federal government on the GSEs can ultimately result in redistribution to the states. That said, we need to recognize that what is happening is a redistribution at least initially from high foreclosure states to low foreclosure states; I'm skeptical that the federal government redistributes to off-set this.

I think your framing of "leave money on the table" or "deficit reduction" is kind of strange. Government savings don't necessarily translate into deficit reduction. Irrespective, what I am suggesting here is that "leaving money on the table" would help spur economic growth (state and local government could hire more employees) and hence a growth in general tax revenue. That would go a much longer way to deficit reduction than starving state and local governments of revenue.

@-Ebenezer Scrooge---Yes, the conservatorship statute doesn't say "do good," but it's pretty open-ended (and it certainly doesn't mandate deficit reduction), and agencies are always able to exercise discretion, particularly over whether to bring litigation. The statute certainly doesn't tell FHFA to litigate over whether a real estate transfer tax is not a real estate tax. That's discretionary. That discretion needs to be exercised with policy goals in mind, and imho this litigation is a poor use of agency discretion.

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Wasn't there a (state) supreme court that GSEs from Rreal estate transfer taxes ?

This isn't about "HOA fees" - it's about transfer fees and attempts by local government and private corporations to impose them on real estate. Local government was bad enough but for several years now rent seekers such as developers and HOA management companies have attempted to turn HOA-burdened property into the residual income stream into perpetuity plan using "transfer fees". In fact that is one of the reasons that the land is being burdened with an HOA to begin with.

The FHFA made it clear that they aren't going to tolerate rent seeking "transfer fees" regardless of whether the money is going to an HOA management company, third party "foundation", or local government.

The HOA example was to illustrate just how pervasive this rent seeking behavior has become and none of it benefits the property that the fee is being imposed on. It is not a tax on the real estate - it is a fealty demanded upon transfer of title to real estate. The fee is wholly unrelated to the clerical cost associated with performing a task as evidenced by Illinois' multiple layers of fees for different hierarchies of government and the fact that the fee is not fixed but rather based upon the value of the property.

Illinois needs to find a more legitimate method of raising monies and FHFA is doing a great job to avoid allowing GSEs to invest in loans secured by properties that impose private transfer fees payable to private corporations, foundations, or management companies. This is a significant thing. There are something like 60+ million homeowners whose homes are burdened by an involuntary membership corporation.

On and after July 16, 2012, the GSEs are prohibited from investing in these properties if there are "transfer fees" being imposed upon them when the transfer fee does not directly benefit the property. Needless to say it is rare that the transfer fee benefits the property. Usually it just benefits the developer, developer-controlled foundation, or vendors of the HOA.

The homeowners did not "choose" these fees and there are no services provided to the homeowner at all or alternatively that the homeowner has not already paid for. The behavior of this industry will render the homes within many subdivisions virtually unmarketable because the HOA industry believes it is entitled to a windfall "transfer fee" at the expense of the homeowner or lender of the homeowner. FHFA said "no more".

Wasn't there a (state)supreme court decision that stated that GSEs wer not exempt from real transfer taxes ?

"The GSEs claim that when a loan defaults, the property is automatically transferred to the servicer"

This is a good observation. What about capital gains or income tax nevermind the real estate transfer tax.

These are all psuedo transfers of ownership where they want the benefit of being the "owner" so they can foreclose. Yet they don't want the liability of taxes.

More accounting gimics created out of whole cloth by the banks.

Not really a surprise

Question for the readership:

Scenario: a homeowner files bankruptcy, and defends against a Motion to Lift Stay; then ultimately discharges the mortgage note. The mortgage is a standard form FM/FMLA 3030 (1/01).

The mortgage provides proceeds shall be applied in the following order: (1) expenses of sale (2) sums secured by this Security instrument and (3) any excess to the person legally entitled to it.

Since the note has been discharged, there are no sums owed, so is the mortgagor not entitled to the net proceeds?

Anyone ever made this argument or know of any cases where it was made? How about Matt Weidner?

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