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Becker County joins low-risk tax lawsuit against Fannie Mae

Fannie Mae and Freddie Mac say they are exempt from paying deed transfer taxes on foreclosed property they have handled -- so Becker County has joined a class action lawsuit against the two large mortgage agencies.

It's a low-risk, low-reward proposition for Becker County, since the county only has to help pay for the lawsuit if it is successful -- and it doesn't stand to gain a whole lot even if it wins.

But it means roughly $11 million across Minnesota -- 97 percent of which will go into state coffers.

At issue are deed transfer taxes that amount to $330 (.0033 percent) on the sale of a $100,000 house.

"Our position is they are not exempt," Becker County Attorney Mike Fritz told the Becker County Board Tuesday. "They are for-profit organizations and need to pay."

He is not sure how much money it would bring into Becker County, but doesn't expect it to amount to much.

Hennepin County filed the class action lawsuit Aug. 24 on behalf of all Minnesota counties to recover those taxes for real estate that Fannie Mae and Freddie Mac have sold over the past six and a half years.

The Federal National Mortgage Association, commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal.

It is a government-sponsored enterprise, though it has been a publicly traded company since 1968.

Fannie Mae and its smaller cousin, Freddie Mac, say they are exempt from Minnesota's deed transfer tax.

State law exempts federal agencies from paying the tax, but Hennepin County Attorney Mike Freeman argues in the class action lawsuit that they are not federal agencies and must pay the tax.

"While they were originally created as quasi-governmental entities, both Fannie Mae and Freddie Mac are publicly-traded, for-profit corporations," Freeman argued. "Thus, the state law exemption does not apply."

Courts are split on the issue -- with decisions from Washington and Nevada favoring the mortgage giants and a federal court in Michigan siding with the state.

In that case, the court relied on a U.S. Supreme Court decision which held that exemptions from "all taxes" apply only to "direct" taxes and do not apply to "excise" taxes.

Deed transfer taxes are considered "excise" taxes because they tax the act of conveying property and not the property itself, Freeman argued.

As a result of the federal court ruling in Michigan, counties in at least 10 other states have filed suit to recover unpaid deed transfer taxes.

Freeman conservatively estimated that Fannie Mae and Freddie Mac have sold 20,000 properties in Minnesota since 2005, meaning they owe approximately $10 million in deed transfer taxes based on the statewide average home price of $151,000 -- and $11.2 million based on the metro area average home price of $170,000.

Becker County will reimburse up to 10 percent of its take if the Hennepin County suit is successful. It will pay nothing if the lawsuit is shot down.