City sues Freddie, Fannie

Spokane city leaders allege they’ve been cheated out of hundreds of thousands of dollars in taxes by two high-profile financial insitutions – money the city would have used to fix streets.

The city of Spokane filed suit in federal court this week against Fannie Mae and Freddie Mac, alleging that the corporations improperly claimed they were exempt from paying the state’s real estate excise tax.

City Attorney Nancy Isserlis said that in the past four years Fannie and Freddie sold about 1,300 pieces of property in Spokane County and likely would have paid about $4 million in real estate taxes had they not claimed to be exempt. Most of that would have gone to the state, but about $1 million would have been directed to local governments like Spokane. Spokane uses its real estate tax money to fix streets.

“It’s important for entities that owe taxes to pay them,” Isserlis said.

The case holds potentially significant implications across the state. The city has requested to be the lead plaintiff in a class-action suit representing all the cities and counties that the city says should have been paid the tax.

Washington’s real estate excise tax is 1.28 percent on the sale price of property, which goes to the state. Many cities and counties, including Spokane and Spokane County, charge an additional 0.5 percent.

The city’s case is largely modeled after a lawsuit by Oakland County, Mich., against Freddie and Fannie for not paying Michigan’s real estate excise tax. A judge ruled in favor of Oakland County, and the case has been appealed. Since then, other governments have filed suit.

Spokane is the first government in Washington to pursue action against the mortgage giants.

Spokane’s lawsuit said that the institutions argued they didn’t owe the taxes both because they were governmental entities and that their federal charters exempted them.

Isserlis said even though Freddie and Fannie were chartered by the federal government, they are publicly traded companies and should not be eligible for exemptions just because they were created by the government.

Washington Department of Revenue spokesman Mike Gowrylow said the state “is in a wait-and-see mode” on the issue. He noted that other courts, including one in Nevada, ruled in favor of Fannie and Freddie.

Fannie Mae spokeswoman Keosha Burns said Thursday that she could not comment on pending litigation. Representatives of Freddie Mac could not be reached for comment. A spokeswoman from the Federal Housing Finance Agency, which also is named in Spokane’s lawsuit, declined to comment. The FHFA is an agency created in 2008 to oversee Freddie and Fannie.

Freddie Mac – the Federal Home Loan Mortgage Corp. – and Fannie Mae – the Federal National Mortgage Association – buy mortgages from banks and other financial institutions. When homes are foreclosed on, the corporations often sell the properties. Fannie Mae, for instance, had about 50 homes in Spokane County listed Thursday on its website that advertises foreclosed properties for sale.

Spokane City Councilman Steve Salvatori said he’s been concerned for months that the city’s real estate excise tax collections weren’t increasing even though the housing market was improving. He said the exemptions claimed by Freddie and Fannie may help explain why.

“This is a fairness issue,” Salvatori said. “I don’t believe Fannie or Freddie were ever exempt.”

In recent years the city has shifted other tax revenue and reserves to its street maintenance budget to cover the shortfall, as the city’s collections of real estate taxes plummeted in large part because of the recession.

Winston and Cashatt, the firm where Isserlis worked previous to her appointment as city attorney, is handling the case. Two other firms will work on the lawsuit. The city will not have to pay any money to the firms unless it wins, Isserlis said. If the court rules in the city’s favor, the city has agreed to pay the firms 33.3 percent of an award.