In Ohio, and I imagine other states as well, the question of whether deeds from Fannie are exempt from conveyance fees has been very controversial.  It is something that many auditor's offices have struggled with for a long time.  Oddly, there has never really been a consensus in Ohio; some counties charge the conveyance fee, others allow them to pass through as exempt transfers. 

Ohio exempts the transfer of real property "to or from the United States, this state, or any instrumentality, agency, or political subdivision of the United States or this state."  So the real question is - is Fannie an instrumentality of the federal government when it sells property that it acquires through foreclosure?  The Ohio Department of Taxation, in a memo to "all county auditors" has determined that it is not.  Thus, such transfers are not exempt from the conveyance fees.

The Department of Taxation relied on a 6th Circuit case, Northrip v. Fed. Nat'l Mortgage Ass'n, 527 F.2d 23 (6th Cir. 1975), which is controlling in Ohio.  The court held that Fannie is not an instrumentality of the government for purposes of applying due process under the 5th and 14th amendments of the U.S. Constitution to mortgage foreclosure proceedings.  Basically, in a foreclosure, Fannie is not fulfilling a government objective.  It forecloses on mortgages as any other mortgagee would, and in this instance it is not a state actor.

That was completely rational in light of the National Housing Act of 1968, which converted Fannie into a government-sponsored private corporation.  Prior to the Act, Fannie was a hybrid corporation owned partly by private shareholders and partly by the government, but managed by government officials.  The change was made because the legislature believed that the secondary mortgage market operations were more appropriately placed in the private sector under completely private ownership.

Though the government maintained significant regulatory control, Fannie still took on more private characteristics.  For example, it was taxed at the same corporate tax rates as private entities, and employees hired after 1968 became employees of the corporation and were not subject to civil service laws.

But, a lot has changed since National Housing Act of 1968 and the Northrip decision in 1975.  In 1995, the Supreme Court, in Lebron v. Nat'l R.R. Passenger Corp., 513 U.S. 374 (1995), created a two-prong test used to determine whether a federally chartered corporation is an instrumentality of the government.  In order to be considered an instrumentality, two conditions must be satisfied.  First, the government created the corporation by special law for the furtherance of governmental objectives.  Second, the government retains permanent authority to appoint a majority of the directors.

I believe the first prong is satisfied.  The government created Fannie through legislation to create a secondary market for home mortgages, thereby increasing home ownership.  But, rather than focus on the "creation of the corporation" to further a governmental objective, the Department of Taxation focused on a specific action taken by Fannie to determine that "foreclosure" served no governmental objective.

[B]y foreclosing on, and taking title to real property, Fannie Mae [is] not fulfilling [its] mission of providing a secondary market for home mortgages.  [It] is not acting in a governmental capacity or serving any governmental objective, [it is] simply foreclosing on, and taking title to, real property, as any other private entity would. 

But, of course, Fannie's foreclosures are a necessary part of providing the secondary mortgage market.  It is a weak argument to say that buying mortgages furthers a governmental objective, but enforcing them does not.  The two must go hand in hand.  Perhaps for this reason, the Department of Insurance really focused on the second prong to find that Fannie is not an instrumentality of the government.

Since only five of the eighteen directors of Fannie Mae are appointed by the President, and the other thirteen are elected by the shareholders, Fannie Mae also fails the second prong of the Lebron two-part test and, as a result, Fannie Mae is not an instrumentality of the U.S. for constitutional purposes.

It is true that by statute the government did not permanently retain the power to appoint a majority of the directors.  But, in all practicality - the government exerts an extreme amount of control over Fannie today.  According to a Wall Street Journal article:

The Treasury Department and the Federal Housing Finance Agency jointly took control of Fannie Mae and Freddie on Sept. 7, firing the CEOs and boards. The Treasury pledged to inject as much as $200 billion in capital into the companies as needed to keep them solvent. In return, it received $1 billion of senior preferred stock in each company and warrants to purchase nearly 80% of each firm's common stock.

So, how does the Department of Taxation dispose of the impact of the government's take-over of Fannie to reach its conclusion that Fannie is not an instrumentality and not exempt from conveyance fees? 

Moreover, the recent so-called take-over of Fannie... is simply a management tool, called a conservatorship, likened to a corporation being reorganized in bankruptcy.  Fannie [is] still referred to as [a] for-profit, private [company].  The Federal Housing Finance Authority... has not taken-over the compan[y] in a Lebron sense, since it has not replaced the board of directors and appointed a majority of them.  Consequently, Fannie [is] still [a] for-profit, private compan[y] and should not be considered as [an] instrumentalit[y] of the federal government for purposes of transferring real property.  As a result Fannie [is] not eligible for the real property conveyance fee exemption...

Just two days after the Department of Taxation drafted its memo, Reuters reported that Fannie's regulator (i.e., the government) named nine board members.  Perhaps that was just bad timing for the Department who proclaimed that the government had not appointed "a majority" of the board, but nine is most certainly a majority of the thirteen-member board. 

I would not argue that Fannie was created as a private corporation and the Department's position would have certainly been correct prior to the "take-over" by the government.  But, things have drastically changed since then.  Most likely this decision was prompted by the state's, and the counties', need for revenue.  Because of the gray area of the law and the recent unprecedented changes in the secondary mortgage market, a compelling argument can be made to support either position on the exempt status of Fannie.  What is really missing is a logical discussion of the purpose of the exemption.

The most logical reason for exempting governmental entities from taxation (i.e., conveyance fees), is that they are funded with public tax dollars.  A tax on an entity funded by taxpayers is an indirect tax on the public.  It really would make no sense to use taxpayers' money to pay taxes.  So all of this legal analysis really misses the point when the issue is whether Fannie should be exempt from conveyance fees.  The real question that needs to be asked is - is Fannie funded by tax dollars?

In normal times, the answer should be "no."  But, these aren't normal times.  According an article in the New York Times, Fannie reported a loss of $29 billion in the third quarter alone, and its "exposure on subprime and subprimelike mortgages was much higher, $960 billion."  With the government providing as much as $200 billion in taxpayer funding to keep Fannie afloat, I think it is safe to say that Fannie is funded by the taxpayers, at least in large part.

Subjecting Fannie to conveyance fees will cost it significantly more given the record number of foreclosures.  Higher expenses at Fannie means that it will need more money from the government - more tax money. 

Using federal tax dollars to pay local conveyance fees just doesn't seem like a logical result to me.  Until Fannie is "really" a private corporation again, if it every really was, I think it probably should be exempt from conveyance fees.  The Department's determination, though soundly presented with solid legal precedent, relies on a legal fiction that Fannie is a private corporation. 

If it walks like a duck, and talks like a duck, you can't tax it like Duck a l'Orange.

Robert A. Franco
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