Cook County Record

Saturday, April 4, 2020

Chicago can't collect real estate transfer tax from buyers of homes sold by Fannie, Freddie, judge says

By Jonathan Bilyk | Sep 30, 2016

Chicago federal courthouse flamingo from rear

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 North Side.

In those cases, the city sent the buyers tax bills for as much as $3,200, despite laws Fannie Mae argued forbidding this.

“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 troubled properties.

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 need them.

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.


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Organizations in this Story

King & Spalding LLPFannie MaeChuhak & Tecson, P.C.Stahl Cowen Crowley Addis LLCWinston and Strawn LLPDiTomasso Lubin Law OfficesU.S. Federal Housing Finance AgencyArnold & Porter LLPKinnally Flaherty Krentz Loran Hodge & Masur P.C.City of Chicago