County class action lawsuit seeks $10 million in state deed taxes

Hennepin County Attorney Michael Freeman, with Board of Commissioners Chair Mike Opat at left, speaks at a news conference Aug. 24 at the Hennepin County Government Center. Freeman and Opat announced a lawsuit against mortgage corporations Freddie Mac and Fannie Mae for allegedly failing to pay the Minnesota Deed Transfer tax. (Photo by Katy Zillmer – Sun Newspapers)

Hennepin County Attorney Michael Freeman, with Board of Commissioners Chair Mike Opat at left, speaks at a news conference Aug. 24 at the Hennepin County Government Center. Freeman and Opat announced a lawsuit against mortgage corporations Freddie Mac and Fannie Mae for allegedly failing to pay the Minnesota Deed Transfer tax. (Photo by Katy Zillmer – Sun Newspapers)

Hennepin County has filed a class action civil lawsuit against mortgage loan corporations Fannie Mae and Freddie Mac for allegedly failing to pay a deed tax on homes they acquired during the foreclosure crisis that began in 2005.

“This case was filed this morning as a class action on behalf of all Minnesota counties,” said Hennepin County Attorney Michael Freeman during a news conference Aug. 24.

The suit claims Fannie Mae and Freddie Mac failed to pay the Minnesota Deed Transfer Tax on properties the corporations owned during the foreclosure crisis.

The deed transfer tax is paid by the seller of a property and collected when a deed is recorded.

Fannie Mae, short for Federal National Mortgage Association, and Freddie Mac, short for Federal Home Loan Mortgage Corp., are corporations established by Congress to ease the process by which Americans obtain mortgages and purchase homes, according to the county attorney’s office. The companies purchase mortgage loans established by other entities, such as banks, in large amounts and pool the funds to provide capital for the lending marketplace.

However, when the foreclosure crisis hit in Minnesota, the companies’ involvement in loans increased to thousands of properties and the resulting unpaid state deed tax claimed by the counties added up to just more than $10 million, Freeman said.

According to the Hennepin County Attorney’s Office, Fannie Mae and Freddie Mac were not the original lenders of properties affected by foreclosure and most homeowners did not know the companies were even involved with their loans.

Hennepin County’s foreclosure rate from 1988 to 2004 was between 1,000 and 1,200 properties per year, according to the county attorney’s office. The rate spiked at 5,000 foreclosures in 2007 after the housing market collapsed. Foreclosures in 2012 are on track to be nearly 4,500, according to the county attorney’s office.

“All of us when we sell our home have to pay state deed taxes,” Freeman said. “The state deed tax is collected by the county (and) most of it is sent to the state … when the mortgage foreclosure crisis hit all of a sudden Fannie (Mae) and Freddie (Mac) got into the home sale business big time and they have been refusing to pay their state deed taxes. Their argument is they’re exempt because they’re a federal instrumentality,” he said.

The state deed tax for a median priced home in greater Minnesota, $150,900, is $498. The tax for a median-priced home in the metro area, $170,000, is $561. The county attorney’s office determined the unpaid taxes sought through the lawsuit based on those figures and a “conservative” estimate of the number of properties involved.

Exemption argument

Through the lawsuit, the county attorney will seek to prove Fannie Mae and Freddie Mac are not exempt from paying the tax.

“We believe Fannie and Freddie, just like any other homeowner, ought to pay that tax,” Freeman said.

Approximately eight other states have filed similar lawsuits in the last two weeks, he said.

The U.S. District Court for the Eastern District of Michigan ruled this year that Fannie Mae and Freddie Mac are not exempt from the tax, setting precedent for Minnesota’s case.

According to the county attorney’s office, “Fannie Mae and Freddie Mac have maintained they do not have to pay the deed tax because Minnesota law specifically exempts the United States or any of its agencies. Further, the federal charter given to the two corporations says they shall be exempt from all taxation by states or counties. The civil suit says neither exemption is valid. Fannie Mae and Freddie Mac are publicly-traded, for-profit corporations run by boards elected by common stockholders and are therefore not agencies of the U.S. government.”

Growing case

The number of states that have filed similar cases to Minnesota’s could mean it will become a federal case of the U.S. Supreme Court.

Freeman said he is “certain” that will happen, and possibly in the next 18 months.

If the case is successful – either at the state or federal level – the state will be able to recoup the more than $10 million in the unpaid deed tax.

“The share to Hennepin County out of this is hard to tell because we don’t know exactly how many mortgages, but we think it’s in the millions of dollars,” Freeman said.

Hennepin County and Ramsey County also collected a small tax on deed transfers that has supported an Environmental Response Fund to clean up contaminated properties for redevelopment.

The fund will sunset in 2013, but if the lawsuit is successful revenues could be reinstated for use in environmental clean-up, said Board of Commissioners Chair Mike Opat.

“Because it’s money from year’s past, we think it’s just an overdue bill,” Opat said. “We’re going to try to use our same process.”

Environmental Response Fund projects in the past include Robbinsdale Middle School, the Brooklyn Park Public Works Facility and two business park buildings off Highway 100 at France Avenue in Brooklyn Center, Opat said.

“There is a lot of good things about cleaning up property, you don’t only get rid of the pollution, you put it back on the property tax rolls,” Freeman said.

In addition to the unpaid taxes, the county attorney seeks to recoup interest on the unpaid taxes, attorney’s fees and a ruling that the corporations cannot claim future exemption for the state deed tax, according to the county attorney’s office.

“The entire board is supportive of this effort,” Opat said. “We look forward to its successful conclusion.”

 

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