A federal court in Illinois has declared the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac exempt from Chicago’s Vacant Property Ordinance (Ordinance). As readers of the CFS-Lawblog know, the Federal Housing Finance Agency (FHFA) sued the City of Chicago in December 2011 to prevent enforcement of Chicago’s Ordinance against FHFA, Fannie Mae and Freddie Mac on the grounds that the Ordinance: (i) is pre-empted by the Housing and Economic Recovery Act of 2008 (HERA); and (ii) constitutes an impermissible tax on the federal government and violates HERA’s prohibition on fines and penalties against the FHFA. Judge Thomas Durkin of the Northern District of Illinois agreed and granted the FHFA’s motion for summary judgment. Though this district court ruling lacks precedential effect, it could be used by the FHFA to challenge vacant property ordinances that local municipalities have enacted throughout the country. The ruling also gives support to those mortgage servicers who have been paying vacant property ordinance-related fees and penalties “under protest” on behalf of the FHFA, Fannie Mae and Freddie Mac. This ruling, however, does not offer any solace to private lenders.

The Ordinance Is Preempted By Housing and Economic Recovery Act of 2008

In granting the FHFA’s motion for summary judgment, Judge Durkin acknowledged that the HERA did not expressly preempt the Ordinance, but that preemption was implied under both field and conflict preemption. The Court held that field preemption was implied because Congress clearly intended the HERA to “occup[y] the field with regard to the supervision and regulation of Fannie Mae and Freddie Mac.” Durkin explained that, “[i]n enacting HERA, Congress could not have intended to preclude other federal agencies and states from regulating FHFA’s operations, but permit thousands of municipalities all over the country to impose varying ordinances and obligations on FHFA.” Durkin remarked that “[s]uch a result would invite chaos, as FHFA would be subject to a variety of potentially conflicting ordinances, raising the expenses of FHFA in not only complying with those ordinances, but in simply monitoring the various requirements.” Durkin also found that the Ordinance was barred under the doctrine of conflict preemption because the “Ordinance obstructs Congress’s intent to have one conservator take control of Fannie Mae and Freddie Mac.”

The Ordinance Constitutes An Impermissible Tax

While the Court held that its preemption holding was enough to grant summary judgment on behalf of the FHFA, it also found that the FHFA, Fannie Mae and Freddie Mac were exempt from the Ordinance because the registration fee and associated fines/penalties constitute an impermissible tax on the FHFA. First, the Court held that the registration fee was a considered a “tax” because the revenue from the registration fee “does not go to pay for some service that the city renders to FHFA, or to some service that is required by the existence of FHFA.” Therefore, the registration fee violated the federal government’s immunity from state and local taxation. The Court also found that the Ordinance violates HERA’s prohibition on fines and penalties assessed against the FHFA.

The ruling is good news for the FHFA, Fannie Mae and Freddie Mac. Not only are these entities currently exempt from the Ordinance, but this ruling could be used to challenge similar ordinances throughout the country, which the Chicago Tribune estimates are in excess of 1,100. This ruling is also good news for those companies that service mortgage loans on behalf of Fannie Mae and Freddie Mac, as these entities are often responsible for complying with these ordinances on behalf of Fannie Mae and Freddie Mac. The ruling, however, only applies to the FHFA, Fannie Mae and Freddie Mac, which means that private lenders and investors are still obligated to comply with Chicago’s Ordinance.

There is no word on whether Chicago intends on appealing the ruling, but Judge Durkin predicted, "[t]his may not be the last court you're in front of, once I rule."