Hundreds of millions of dollars are on the line as Georgia counties turn to the courts to recoup money they lost after the real estate meltdown.
It’s unclear how much the litigation could cost the counties to pursue. But, if they’re successful, local taxpayers could reap hundreds of millions of dollars that could shore up public services at a time when governments are cutting back.
Fulton County alone faces a budget deficit of nearly $114 million in 2014.
In a series of lawsuits filed over the last year, Fulton, Gwinnett, DeKalb, Cobb and other Georgia counties maintain that Fannie Mae and Freddie Mac illegally avoided real estate transfer taxes on foreclosed properties they sold.
Several metro counties also have sued the British bank HSBC, which they maintain was one of the worst offenders of predatory lending practices. Those practices, the counties say, contributed to the foreclosure crisis, cost counties tax revenue and increased public expenses related to abandoned properties.
The mortgage agencies say they’re exempt from the local taxes under federal law, while HSBC says the counties can’t blame their troubles on the bank. A law professor who has studied the recession’s impact on local governments thinks the counties will be hard pressed to prevail in the litigation.
But a lawyer for the governments suing HSBC says the counties owe it to the public to hold institutions accountable for wrongdoing he says led to the housing crisis.
“A lot of people made a lot of money,” said Atlanta attorney James Evangelista. “There have not been any serious criminal prosecutions for this kind of behavior. It’s really the counties’ duty to hold those people accountable.”
There’s no doubt the Great Recession took a toll on local governments.
Real estate values have plummeted, and tax receipts have fallen with them. Last year, for example, Fulton County general fund property tax revenue was down about $81 million — or 17 percent — from its 2010 peak.
Counties also have spent time and money on code enforcement and other expenses related to vacant properties. Now they’re trying to recoup some of those losses.
In lawsuits filed in U.S. District Courts in Atlanta and elsewhere in Georgia, counties claim the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”) failed to pay taxes on real estate transactions, costing the counties millions of dollars.
Congress created those agencies to promote home ownership in part by buying and guaranteeing mortgages. As the real estate market collapsed, Fannie Mae and Freddie Mac acquired and sold thousands of foreclosed homes in metro Atlanta.
Under state law, county clerks in Georgia collect a real estate transfer tax on deeds and other instruments filed for real estate transactions. According to court documents, Fannie Mae and Freddie Mac have not paid the taxes, citing an exemption for government and nonprofit agencies.
In the first local lawsuit, filed last summer, DeKalb County claims Fannie Mae and Freddie Mac must pay the real estate taxes because they are not government or nonprofit agencies, but private, for-profit corporations chartered by the federal government.
Spokesmen for Fannie Mae and Freddie Mac said they could not comment on pending litigation. In court documents, the agencies claim federal law exempts them from paying the Georgia taxes at issue. They cite numerous court decisions dismissing similar claims across the country.
Nonetheless, at least six other federal lawsuits in Georgia make similar claims. Among them: a lawsuit filed by nine counties – including Fulton, Gwinnett, Cobb and Cherokee. Similar lawsuits have cropped up across the country.
In three of the lawsuits – including one filed by Clayton County and five other local governments – judges already have ruled the agencies don’t have to pay the tax. The governments have appealed two of those decisions, including the Clayton County case.
Former Gov. Roy Barnes, an attorney representing many of the counties, said his firm is still researching the amount Fannie Mae and Freddie Mac may owe in taxes. But he said it likely runs into the millions.
“It’s a substantial amount of money,” Barnes said.
Fannie Mae and Freddie Mac aren’t the only targets as local governments seek to recoup damages they say they’ve incurred as a result of the real estate collapse.
In a federal lawsuit filed last October, Fulton, DeKalb and Cobb counties claimed HSBC North America Holdings and its affiliates saddled minority and low-income voters with subprime mortgages in a scheme to boost profits. Though the counties say HSBC wasn’t the only bank using such practices, they say it was one of the worst offenders.
An HSBC spokesman in New York declined to comment on the litigation. In court documents, HSBC says Atlanta’s vacant housing problem predates any alleged wrongdoing on its part and can’t be traced to its actions.
The bank says it originated a tiny fraction of home mortgages in the Atlanta area from 2004 to 2007. And it said other factors – including extensive unemployment – likely contributed to the housing crisis.
Last year Wells Fargo settled lawsuits involving similar claims brought by the cities of Baltimore and Memphis and Shelby County, Tenn.
Nonetheless, Alan Weinstein, a law professor at Cleveland State University, thinks local governments will have a hard time proving that banks are mainly responsible for their problems.
“The bank can say, ‘hey, look, nobody was holding a gun to the heads of these (borrowers) when they signed these mortgages. We’re not responsible for the fact that (investment bank) Lehman Brothers went under and the stock market tanked and people lost their jobs,” Weinstein said.
Evangelista, the attorney representing the counties, declined to comment on the specifics of the HSBC lawsuit. But he said lenders that contributed to the housing crisis should be held accountable.
“This is something that’s hurt people in a real way,” he said. “It was deliberate. It was no accident.”
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