FHFA Proposal to Effectively End Private Transfer Fees

The Federal HousingrnFinance Agency (FHFA) took a step last week that may effectively end privaterntransfer fees before the end of the year. </p<pThe agency announced a public comment period on new regulations thatrnwould restrict Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBanks)rnfrom investing in mortgages with private transfer fee covenants.  The proposed "Guidance" wouldrnextend to mortgages and securities purchased by FHLBanks or acquired by them asrncollateral for advances, and to mortgages and securities purchased orrnguaranteed by the Enterprises.</p

Transfer fees arernenabled by covenants on a deed which require a payment to a third party everyrntime property ownership is transferred and are typically 1 percent of thernamount of the sale.  For example:  a developer of a condominium complex mightrnput a covenants on each unit deed that would require the initial buyer andrnevery consecutive buyer to pay such a fee to him regardless of the number of timesrnthe condo changes hands.  This wouldrnprovide the developer with a stream of income long after he cashed out of the developmentrnwith no accompanying requirement to provide any further benefit to thatrndevelopment.  In fact, some of thesernincome streams have actually been securitized by Wall Street.</p

In another scenario,rnthe fee might accrue to the homeowners association or the guarantee of suchrnfees could be used as an inducement to persuade an opponent – an environmentalrngroup for instance – to cooperate with the project.</p

Establishing such arnprivate fee is not necessarily limited to the developer of the property.  A local government could make it a conditionrnof a zoning change; the owner of land could insist on such future income asrnpart of the purchase price of his land. rnTheoretically you could attach a one percent transfer fee covenant tornyour three bedroom Colonial before you sell it. rnAnd so could the next seller and the seller after that so that eachrnsubsequent buyer is increasingly clobbered. rnMany transfer fees are set up to endure for 99 years.</p

FHFA said itsrnconcerns with the private transfer fees include that they:</p<ul class="unIndentedList"<liIncrease the costs of homeownership and reducernliquidity in both primary and secondary mortgage markets;</li<lilimit property transfers or render them legallyrnuncertain;</li<lidetract from the stability of the secondaryrnmortgage market, particularly if such fees will be securitized;</li<liexpose lenders, title companies, and secondaryrnmarket participants to risks from unknown potential liens and title defects;</li<licontribute to reduced transparency for consumersrnbecause the fees often are not disclosed by sellers and are difficult torndiscover through customary title searches, especially after repeated purchases;</li<lirepresent dramatic, last-minute, non-financeablernout-of-pocket costs for consumers;</li<lideprive subsequent homeowners of equity value;rnand</li<licomplicate residential real-estate transactionsrnand introduce confusion and uncertainty for homebuyers.</li</ul

Acting FHA Director Edward J. DeMarco said “The privaterntransfer fee covenants appear to run counter to the important mission of thernhousing GSEs (government sponsored enterprises) to increase liquidity,rnaffordability, and stability in the nation's housing finance system.  Encumbering housing transactions with feesrnthat may not be property disclosed may impede the marketability and the valuationrnof properties and adversely affect the liquidity of securities backed byrnmortgages on those properties.</p

The agency said it recognizes that there are a range ofrnactions it can take, including requiring reports on the extent regulatedrnentities are exposed to transfer fee investments, changing seller/servicerrnguides to identify restrictions on the purchase of transfer fee-encumberedrnmortgages, creating and enforcing additional representations and warranties orrnto prohibit the purchase of investment in the mortgages or the revenuerngenerated by the fees.  It appears thatrnFHFA is rejecting all but the final alternative.</p

The proposed guidancernwould bring the GSEs and the FHLBanks into line with the Federal HousingrnAdministration (FHA).  HUD's regulationsrnat 24 CFR 203.41 have been interpreted as prohibiting FHA insurance onrnproperties with transfer fees which it defines as “legal restrictions onrnconveyance.” A number of states have also banned the fees and such legislationrnis under consideration by others.</p

Advocates of privaterntransfer fees argue that the fees are beneficial when they are used to fundrnproject developments or to enhance community investments through homeownersrnassociations, affordable housing groups, environmental organizations orrncharitable organizations.  FHFA countersrnwith a concern that such fees are used to fund purely private continuousrnstreams of income and that the fees, even if dedicated to homeownersrnassociations, may not be proportional or related to the purposes for which theyrnwere collected.  The draft FHFA guidancerndoes not distinguish between a private transfer fee covenant which supposedlyrnrenders a benefit to the property and one which accrues value to unrelatedrnthird parties. </p

The agency alsornexpressed concern that encumbering housing sales with fees that may not bernproperly disclosed could adversely affect the liquidity of securities backed byrnmortgages on those properties, a concern that is particularly strong in today'srnfragile housing market.  There is also concernrnthat disclosures may be insufficient and add costs not fully understood byrnconsumers.  The proposed Guidance alsornstates that “FHFA has found that the typical one percent fee at the timernof resale is neither a minimal nor a reasonable mount; further such fees may bernexcess of one percent.  Such feesrnincrease by a meaningful amount the seller's and potentially the buyer's burdenrnat the time of a property sale.  Expandedrnuse of private transfer fee covenants poses serious risks to the stability andrnliquidity of the housing finance markets.”</p

The comment periodrnwill extend for 60 days after the proposed guidance is published in ThernFederal Register.  Parties wishing tornmake comments can get further information at the Federal eRulemaking Portal at http://www,.regulations.gov.  Reference “Guidance on Private TransferrnFee Covenants (No. 2010-N-11).

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