The city of Chicago should not be allowed to sidestep laws
barring cities from collecting taxes on real estate sold by federal mortgage lending
giants Fannie Mae and Freddie Mac by simply passing on the tax bills to those
buying the properties from Fannie and Freddie, a federal judge has ruled.
On Sept. 29, U.S. District Judge Sara L. Ellis found in
favor of the Federal National Mortgage Association, commonly known as Fannie
Mae; the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac;
and the Federal Housing Finance Agency, the federal agency which oversees both
agencies, saying the city of Chicago has no right under the law to attempt to
collect so-called real estate transfer taxes either from the federal lenders
themselves or the people buying homes the federal lenders are selling.
“The Court finds that when Fannie and Freddie sell
properties they own pursuant to a mortgage default and those sales are taxed,
the Transfer Tax harms Fannie and Freddie regardless of who - Fannie, Freddie,
or a counterparty like a Buyer Plaintiff - pays the tax, in contravention of
the Tax Exemption Clauses,” Ellis wrote in her opinion.
The case landed in federal court in October 2015, when
Fannie Mae and the FHFA filed suit against the city over its attempts to
collect taxes from the individuals and investors purchasing foreclosed homes
from federal lenders.
Typically, when a property is sold in Chicago, the city seeks
to collect taxes equivalent to $3.75 per every $500 of the assessed
value, plus an additional special tax for the Chicago Transit Authority of $1.50 per $500. That real estate transfer tax is typically paid by the buyer
at the time the title to the property is transferred to the new owner.
Federal law prohibits cities and other local governments
from levying such taxes to property held by federal lenders, like Fannie Mae
and Freddie Mac. However, in this case, the city waited for the properties to
be sold and then sent tax bills to the buyers.
Fannie Mae’s complaint centered on four particular home
sales, in the 5000 block of West Hutchinson Street, in
the city’s Portage Park neighborhood; in the 2900 block of North Sacramento
Boulevard in Logan Square; in the 6900 block of West Wolfram Street in the
Montclare neighborhood; and in the 1100 block of West Maple Street in the Near
In those cases, the city
sent the buyers tax bills for as much as $3,200, despite laws Fannie Mae argued
“The City cannot lawfully
impose excise taxes on an Enterprise’s sale of real property or collect such
taxes from any party to such a transaction,” Fannie Mae said in its original complaint.
“Yet, that is what the City and its officials purport to do.”
The city had asked the
federal judge to dismiss the lawsuit, saying the buyers should be on the hook
for the tax, as the property is no longer held by Fannie and Freddie.
Ellis, however, said such
reasoning would serve to undermine the purpose of the exemptions for the
federal agencies. The judge said such exemptions were designed to ensure Fannie
and Freddie would remain competitive in the marketplace and would not be
tempted to use local tax rates as a basis for determining where to buy and sell
Should cities be allowed to
simply transfer that tax to buyers, Ellis said that would either essentially
raise the price paid by buyers or force Fannie and Freddie to sell for less,
making less money available for the federal lenders to “pump into the secondary
mortgage market” and make more loans and homes available to home buyers who may
Ellis said abundant federal
case law support her findings, which together demonstrate “Fannie and Freddie’s
Tax Exemption Clauses cover the Transfer Tax, and … the Tax Exemption Clauses
prevent Defendants (the city of Chicago) from applying the Transfer Tax to
Fannie’s and Freddie’s real estate sales, regardless of whom Defendants require
to pay the tax.”
She granted summary judgment in the case to the federal lenders.
Ellis, however, put off a
decision on a request from those who had purchased the Fannie Mae properties to
overturn the tax assessments levied against the buyers, saying that matter
could yet be resolved using challenges in the Cook County Circuit Court.
Fannie Mae, Freddie Mac and
the FHFA were represented in the action by attorneys with the firms of Winston
& Strawn, of Chicago; Arnold & Porter, of Washington, D.C.; King &
Spalding, of Washington, D.C.; and Chuhak & Tecson, of Chicago.
The buyers of the Fannie Mae
properties who were assessed the transfer taxes were represented in the case by
the firm of Stahl Cowen Crowley Addis, of Chicago.
The city was represented by
attorneys with its Department of Law.
The questions in this case
have also spawned a class action filed against City Hall in Cook County court,
where a woman who purchased property from Fannie Mae had claimed the city owes
her and other buyers of Fannie and Freddie properties refunds for transfer
taxes collected from those sales.
That case, filed by
plaintiff Lelani Fetrow through attorneys with the firms of DiTommaso Lubin, of
Oakbrook Terrace, and Kinnally Flaherty Krentz Loran Hodge & Masur, remains
pending in Cook County Circuit Court.