City of Spokane v. Fed. Nat'l Mortgage Ass'n

Congress has the constitutional authority to exempt Fannie May and Freddie Mac, part of the secondary mortgage market, from state and local taxes.

The City of Spokane, Washington brought suit against Fannie Mae (the Federal National Mortgage Association), Freddie Mac (the Federal Home Loan Mortgage Corporation), and their conservator the Federal Housing Finance Agency (“FHFA”) to collect taxes on the transfer of property. Under 12 U.S.C. §§ 1452(e) and 1723a(c)(2), Fannie Mae and Freddie Mac are exempt from all state and local taxes, “except that any real property shall be subject to State and local taxation to the same extent…other real property is taxed.” Spokane argued that the transfer tax is not within the exemption because it is a tax on real property. The Ninth Circuit rejected this argument and, like other circuit courts have decided, determined that the transfer tax is an excise tax, not a property tax. Spokane also argued that Congress exceeded its authority granted to them by the Commerce Clause when exempting Fannie Mae and Freddie Mac, because state and local taxes are not commerce. The panel reasoned that because Congress has the power to regulate the secondary mortgage market, Congress has the ability to establish and regulate secondary market facilities for residential mortgages that are rationally related to the secondary mortgage market. Under the Necessary and Proper Clause, Congress has the power to establish Fannie Mae and Freddie Mac and to exempt them from state and local taxes to “ensure their preservation.” The panel further rejected Spokane’s argument that the tax exemptions violated the Tenth Amendment, because Congress was acting within its enumerated powers and has the ability to limit state and local taxes. AFFIRMED.