Breaking: Significant re-fi tax change in Fairfax

Background (in rough, laymen’s terms): Virginia law says that, if you refinance your mortgage with a different company than your original mortgage, you must pay (the full) recordation tax. But if you refinance with your existing lender, the transaction is exempt from paying the recordation tax again. (VAR fought to change this law this year.)

However, because of so many bank closings and mergers — not to mention the secondary lending market and the entire mortgage securitization issue — it can be difficult to determine whether the re-fi lender is the same as the original lender. (Chances are it’s not, because most loans are sold quickly even if the original lender still services them.) In general, though, Virginia Circuit Court Clerks have taken homeowners at their word when they refinance and claim the exemption.

But Fairfax County has just imposed a requirement for an additional level of proof. Quoth a letter from John Frey, the Clerk of the Court for Fairfax County:

Beginning March 1, 2011, in order to be eligible for the refinance with the same lender exemption in Fairfax, a statement from MERS showing the owner of the note OR a statement from Freddie Mac AND a statement from Fannie Mae showing that they do not own the loan, must accompany the payoff statement. In addition, we will require a copy of the first page of the prior Deed of Trust. […] The only exception is for Federal Credit Unions. It appears that most, if not all, do not sell their loans.

Frey made it clear that he supports eliminating the refi tax entirely — as the bill VAR introduced this year would have done had it passed. He went so far as to call the current law "intellectually dishonest" because some taxpayers are being taxed twice on the same debt; "This double taxation is wrong.," he wrote. Nevertheless, Frey is required to obey and uphold the law. That means a homeowner is not entitled to an exemption just because the servicer of the old loan is the same as the lender of their new loan. And that, Frey points out, means the vast majority of homeowners are not eligible:

Most loans are sold to Freddie Mac, Fannie Mae or institutional investors with the servicing rights retained by the loan originator. If the loan has been sold to Freddie Mac, Fannie Mae or an institutional investor, the refinance transaction is not entitled to the exemption.

Frey’s experience is that many homeowners’ advisors (formal or informal) are telling them — incorrectly — that they qualify for the refi tax exemption. That leads to some unhappy homeowners when they’re presented with the bill. If you’re giving advice to your clients, be aware of the letter of the law, and — if you’re in Fairfax — of how strictly it’s being enforced.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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