GSEs, MERS and Lenders Fight Fee Litigation

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MORTGAGE EXPERT
4 · 25 · 13

Municipalities are now taking Fannie Mae and Freddie Mac to court, citing the conversion from government-sponsored enterprises to a private companies as grounds for the loss of the exemption from paying taxes and fees. Lawsuits against MERS continue with many municipalities citing a ruling from a Michigan-based federal trial court as precedent. And a government fraud investigator has prevailed in his lawsuit accusing a mortgage lender of fraud.

Erie County in New York has joined the ranks of municipalities suing Fannie Mae and Freddie Mac in order to recoup unpaid transfer taxes. The county filed a lawsuit on March 20 in federal court that seeks $2 million. A check of court records indicates that an answer has not yet been filed.

The county contends that the two federally-charted and privately-held corporations have failed to pay both the New York Real Estate Transfer Tax and Erie County Real Estate Transfer Tax on thousands of mortgages in Erie County, depriving local taxpayers and municipalities of rightful tax income.

New York State law exempts agencies or instrumentalities of the U.S. government from the transfer tax. Fannie and Freddie have received tax exemptions in the past by claiming governmental status. However, while the pair of secondary lenders were originally created as quasi-governmental entities and continue to receive government support, both currently are publicly traded private corporations, according to allegations in the complaint. The county argues that this significant change in status invalidates their exemption from transfer tax liability and provides grounds for the recovery of the back taxes.

In a written statement, the county said precedent for the lawsuit stems from the U.S. District Court for the Eastern District of Michigan’s determination that federal law does not exempt Washington, D.C.-based Fannie and McLean, Va.-based Freddie from state transfer taxes (Oakland County vs. Federal Housing Finance Agency). In that ruling, the court reasoned that while federal agencies are exempt from direct taxes, they are not exempt from excise taxes. The Real Estate Transfer Tax is considered an excise tax and not a direct tax because it taxes the conveyance of a property and not the property itself. The decision has been appealed.

Similar lawsuits have been filed by counties in several states and the District of Columbia.

In Bristol County v. Fannie Mae, Freddie Mac, the Massachusetts county filed for summary judgment on April 9 in it its lawsuit against the GSEs to recover deed excise money. The county also relied on the Michigan decision in taking Fannie and Freddie to court.

In Montgomery County, Maryland v. Fannie Mac, et al., Fannie, Freddie and FHFA were sued by the affluent Washington, D.C., suburb in January. The county argued in the federal court filing that the home-mortgage finance companies can’t claim a government exemption from property fees because they have been federally chartered, publicly traded, private-stock corporations since March 31, 2003. A motion for partial summary judgment was filed on March 1. A response to the motion has not yet been filed.

But in Delaware County, Pennsylvania et al. v. FHFA as conservator for Fannie Mae and Freddie Mac, Fannie and Freddie were ruled exempt from paying the transfer tax. A federal judge rejected arguments by Delaware and Chester counties that the transfer tax is a levy on real estate and thus is an exception to broad, congressionally mandated immunity from state and local taxes enjoyed by Fannie Mae and Freddie Mac. A notice of appeal was filed on April 22.

And MERS continues to face more fee litigation.

Kentucky Attorney General Jack Conway filed Kentucky AG Conway v. MERS in January 2013 resulting from his investigation of mortgage foreclosures. An order by the judge was signed on April 10 in response to a request for an attorney not admitted to that jurisdiction to participate in the lawsuit. The lawsuit alleges the subsidiary violated Kentucky law by not recording mortgage assignments with county clerks when mortgages were sold or transferred from one bank to another.

In Ramsey, Hennepin Counties, Minnesota v. MERS, which was filed on Feb. 27, a notice of appearance was filed on April 12. The counties want to require MERS and its members to follow Minnesota law and properly record each mortgage assignment with the county recorder/registrar of titles and to recover the recording fees MERS and its members avoided paying by refusing to record the assignments. The plaintiffs also maintained that MERS and its members made it difficult to identity the lender who has foreclosed on a property and who is legally responsible for its maintenance. As a result, many homes were left vacant, unattended and in disrepair, which negatively affects property values of surrounding homes.

Travis County, Texas, is expected to file a lawsuit against MERS any day now. In a story in the American-Statesman on March 15, County commissioners unanimously approved filing the lawsuit after a closed meeting. A check of court records indicates that the lawsuit has not yet been filed. Williamson County is also expected to sue MERS. Dallas and Bexar counties have already done so. A check of court records indicates that the lawsuit has not yet been filed.

MERS won a Jan. 30 dismissal in Union County Illinois v. MERSCORP, Inc. A federal judge ruled in the recording fee lawsuit that in Illinois “there is no mandatory duty to record” and as a result, Union County failed to state a claim for relief for violation of the Illinois Consumer Fraud and Deceptive Business Act, unjust enrichment, civil conspiracy, etc. An appeal was filed on Feb. 27, and a record on appeal was prepared on April 22.

Lender lawsuits continue over fees.

In Sonoda v. Amerisave, the online mortgage lender settled the lawsuit for $3.1 million brought on behalf of 120,000 borrowers nationwide. The settlement was granted final approval by a federal court in San Francisco on Feb. 28, and the case was closed on March 4.

Plaintiffs alleged that AmeriSave failed to disclose up-front fees and high cancellation fees and then failed to secure the reduced rates homeowners were promised. Plaintiffs alleged violations of the Truth in Lending Act and state consumer protection statutes. Craig Briskin, a partner with the Washington, D.C.-based firm Mehri & Skalet, PLLC, served as co-lead counsel in the case.

The Court of Appeals reversed on March 26 a decision by the trial court in favor of the plaintiff, Bank of America, N.A., as successor by merger with LaSalle Bank National Association, in Bank of America, N.A. v. LaHave. The $377,439 judgment was on a loan secured by a New Mexico shopping center.

The appeals court was asked to determine whether a late fee consisting of 5 percent of the balance of a note constitutes a penalty unenforceable as a matter of public policy under New Mexico law against the guarantors and concluded that “the waiver is ineffective because the late fee constitutes a penalty in violation of New Mexico public policy and therefore is unenforceable.”

A Washington, D.C., Superior Court jury ruled in October 2012 that OneWest Bank violated the District of Columbia’s consumer protection law by breaching its contract and committing fraud against a special agent with the U.S. Secret Service, according to a statement issued on the verdict in Yerger v. OneWest Bank. Punitive damages were awarded, according to the statement. A reply to a motion requesting attorney’s fees was filed on Dec. 6.

Ross Yerger said in suit papers that OneWest promised to debit his mortgage payment in two bi-monthly payments under its “Equity Accelerator Program.” Yerger said the automatic debit feature was attractive to him because his job requires a lot of travel. But, Yerger said, the program was not executed as promised in the written agreement. He said the bank repeatedly failed to debit the $3,287 payment from his account, causing the house to go into foreclosure in spite of his stepping in several times to make the payments manually and in spite of communicating to him that it would make the payments in the future

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