Fannie, Freddie May Prohibit Private Transfer Fees

By:
Peter King | August 13, 2010
Private transfer fees would practically be banned under a new rule proposed by the Federal Housing Finance Agency (FHFA) that would prohibit Fannie Mae and Freddie Mac from backing mortgages that feature them.
 
Such covenants require the buyer and/or seller to pay a fee to the original developer, a home association or other party each time the property is resold. Since Fannie Mae and Freddie Mac guarantee the vast majority of U.S. mortgages, such a ban would effectively eliminate such covenants from all but the highest end of the U.S. real estate market.
 
The FHA recently indicated that transfer fee covenants are a violation of its own rules. Together with government-supported entities (GSEs) Fannie Mae and Freddie Mac, the three entities presently back about 95 percent of all U.S. mortgages.
 

Adverse effects cited

 
“The private transfer fee covenants appear to run counter to the important mission of the housing GSEs to increase liquidity, affordability and stability in the nation’s housing finance system,” said FHFA Acting Director Edward J. DeMarco. “Encumbering housing transactions with fees that may not be properly disclosed may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages on those properties.”
 
Covenant private transfer fees typically range from 1 percent to 3 percent of the property value each time the home is resold, and remain in force for up to 99 years. About one-third of U.S. states already prohibit them.
 
Critics of private transfer fees say that such covenants merely provide a revenue stream for developers years after their involvement in a housing project has ended, while increasing costs of homeownership for new buyers.
 

Defenders say fees reduce upfront costs

 
The fees are sometimes justified on the grounds that they provide for improvements and routine maintenance at a development. However, the FHFA said that even when dedicated to homeowner associations, such fees are typically not proportional or related to the purposes for which they were collected.  
 
Defenders of the practice say it provides a means to amortize the cost of a housing development over many years, thereby helping to attract needed investment needed. They say it also makes it easier to sell the new homes by reducing purchase costs for the initial buyers.
 

Transparency a concern

 
The notice of the proposed rule published by the FHFA expresses concerns that private transfer fee covenants raise the cost of home ownership and could create legal uncertainties in property transfers. It also says such fees may be hidden from homebuyers, as sellers may not be required to disclose them and they can be difficult to discover through routine title searches.
 
A 60-day public comment period will follow publication of the rule in the Federal Register, which must take place before the rule can be enacted.

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