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‘REO’ Property and the RTF

A condition precedent to the recording of a deed is the payment of the realty transfer fee [“RTF”], or, in the alternative, presentation of proof that no tax is due. N.J.S.A. 46:15-5 et seq. The RTF must be paid at the time of recording; however, if it later appears that additional tax is due, this fact will not affect the validity of the recording and the status of bona fide purchasers, etc., relying thereon. The tax is imposed on the grantor, but the parties may agree between themselves to a different arrangement. The RTF is based on the consideration received by the grantor, which is broadly defined by statute to include: “... the actual amount of money and the monetary value of any other thing of value constituting the entire compensation paid or to be paid for the transfer of title”. N.J.S.A. 46:15-5(c); N.J.A.C. 18:16-1.1 (def. of “consideration”).

 As suggested above, payment of the RTF may be subject to partial or complete exemptions in certain instances. The exemptions are set forth in the statute, N.J.S.A. 46:15-10, which has been supplemented by administrative regulations, N.J.A.C. 18:16-5.1 et seq. In cases where a complete or partial exemption is claimed, the deed must be accompanied by an affidavit of consideration [RTF-1], which sets forth the basis for the same. The recording officer reviews the affidavit and determines whether or not to accept the deed for recording. Thus, as a practical matter, the recording officer must agree that the exemption is properly claimed, or the deed will not be recorded. One area in which a claimed exemption is frequently disputed is discussed below.

So-called REO property (i.e., realty acquired by a lender as the result of a mort-gage foreclosure or deed-in-lieu) is often owned by Federal National Mortgage Association [FNMA] or Federal Home Loan Mortgage Corporation [FHLMC]. In cases where the REO grantor was FNMA or FHLMC, an exemption under N.J.S.A. 46:15-10(b) (“by or to the United States of America, this State, or any instrumentality, agency, or subdivision thereof”) was traditionally claimed and accepted.

But although FNMA and FHLMC were originally created by Acts of Congress as quasi-governmental agencies, they are now private corporations. Nevertheless, they are sometimes called government-sponsored entities [“GSEs”] because they enjoy a special relationship with the federal government. (In September 2008, a newly-formed entity, Federal Housing Finance Agency [FHFA] was appointed as conservator for FNMA and FHLMC.)

Several months ago, Cape May County filed suit in United States District Court against FNMA, alleging that it is not entitled to an exemption from RTF. Cape May County (NJ) v. FNMA, 12 CV 4712. Although FNMA relies on both state and federal statutes, N.J.S.A. 46:15-10(b); 12 U.S.C. 1723a(c)(2) (respectively), a federal court in Michigan previously has ruled that the federal statute was not applicable to Michigan’s version of the RTF, and thus FNMA was liable for payment of transfer taxes. Oakland County (MI) v. FHFA, 11-CV-12666. As a result of these suits, some New Jersey counties have refused to record deeds without payment of RTF where FNMA or FHLMC is the grantor.

Schedule B--Section I of the title commitment typically requires the “execution, delivery and recording of the instrument(s) to be insured”. In order to comply with this requirement, deeds must be in recordable form, which includes, inter alia, the payment of RTF (or the successful claiming of an exemption from same).

Title insurers typically take no position on whether a particular transaction is or is not exempt from RTF. But if a deed cannot be recorded because the recording officer believes (rightly or wrongly) that an RTF exemption has been improperly claimed, then the transaction cannot be consummated. In those instances, arrangements must be made to pay the RTF, so that the deed can be recorded; otherwise, the title cannot be insured. In any event, title companies are prohibited by statute, N.J.S.A. 17:46B-13, from providing legal advice or opinions, and this prohibition extends to tax-related issues. Thus, it is inappropriate for a title company to provide advice or affirmative insurance with regard to the applicability of the RTF to a given transaction.

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