Adam Levitin, Credit Slips

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.

Read more here

Fannie Mae v. Illinois

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