Pitfalls of banning the mortgage transfer fee
A federal agency is moving to prohibit controversial “private transfer fees” on all mortgages funded by Fannie Mae and Freddie Mac. But its proposed ban may extend to transfer fees routinely collected by community associations across the country — potentially forcing some of them to raise assessments on thousands of unsuspecting homeowners.
The Federal Housing Finance Agency, which oversees the two mortgage giants in conservatorship, issued proposed “guidance” Aug. 12 that would prohibit Fannie and Freddie plus the federal home loan banks from investing in mortgages carrying private transfer fee covenants.
Private transfer fees are starkly different from those imposed by local government authorities to raise revenue for public services when properties change hands. In a private transfer fee arrangement, a developer or property owner records a long-term covenant requiring payments to trustees or other private parties every time a resale occurs.
The best-known and most controversial version of this plan is being promoted by Freehold Capital Partners of New York. The Freehold program, which the company says has attracted the participation of “thousands” of development projects worth “hundreds of billions of dollars” around the country, imposes a 1 percent fee that must be paid by the home seller out of the settlement proceeds every time the house is resold during the next 99 years. The money flows from the closing to a trustee, who distributes shares of it to private investors and others, including the developer in some cases.
Freehold’s activities have raised widespread opposition — 18 state legislatures have either restricted or banned the use of private transfer fees in varying forms. The proposal from the FHFA seeks to cut off federally related funding or guarantees for the underlying conventional mortgages that support private transfer fee programs such as Freehold.
Though under conservatorship, Fannie Mae and Freddie Mac still account for a large share of new conventional mortgages. Along with the Federal Housing Administration, which had earlier indicated opposition to private transfer fee plans, the three entities are responsible for upward of 95 percent of mortgage market volume, according to industry estimates.
Edward DeMarco, acting director of the FHFA, said the proposed ban — pending a 60-day public comment period — is necessary because the fees “may impede the marketability and the valuation of properties,” may raise homeownership costs and “contribute to reduced transparency for consumers because the fees are not disclosed by sellers and are difficult to discover through customary title searches.”
The wording of the ban, however, appears to reach well beyond Freehold-type fees to include mortgages where covenants require payments to homeowners associations, affordable housing groups or other community or non-profit organizations, upon each resale of the property.
Many new housing development projects come with not-for-profit homeowners associations that collect assessments from owners to fund community improvements and property management. Some also receive covenanted transfer fee payments to fund part of their work. Still others impose long-term transfer fees designed to benefit specific charities.
For example, Miami-based home builder Lennar has imposed mandatory transfer fees on thousands of homes constructed in its California projects. The fees, which amount to one-20th of a percent of the price of the home each time it resells, support the efforts of the Lennar Charitable Housing Foundation’s anti-homeless and affordable shelter activities, according to a spokesperson for the firm, Marshall Ames.
But the FHFA’s proposal explicitly includes a broad spectrum of such programs in the ban. It says “even where such fees are payable to a homeowners association,” they are “likely to be unrelated to the value rendered and at times may apply even if the property’s value has significantly diminished since the time the covenant was imposed.”
Andrew Fortin, vice president of government affairs for the 30,000-member Community Associations Institute, which represents homeowners and association managers nationwide, said that banning investments in mortgages on properties with transfer fees payable to associations “is potentially a big problem.” Among other negatives, it could force associations to increase annual assessments on individual homeowners.
Fortin said his group “shares the concerns of FHFA about programs that create neo-feudal arrangements” with outside investors, but believes the agency needs to better distinguish between profit-motivated transfer fees and those that benefit public interest and non-profit organizations.
Meanwhile, a spokesperson for Freehold Capital Partners deplored the FHFA’s proposal. Arguing that private transfer fees provide crucial financial support for developers and their customers, Bryan Cohen, the company’s executive vice president and general counsel, said “this is precisely the wrong time to eliminate a program that halts foreclosures, helps restart failed projects, creates jobs and reduces upfront costs to American homebuyers.”
Ken Harney is a real estate columnist with the Washington Post.