FHFA Wants Money Transferred from Local Government to Bondholders

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.