Legislation Would Ban Controversial Transfer Fees

By:
Kirk Haverkamp | October 01, 2010

Should real estate developers and investors get paid off every time a property they created changes hands? That’s the basic question behind legislation introduced this week in Congress that would ban a controversial practice known as real estate transfer fees.

The fees, which are not presently in widespread use, require that the original developers or investors receive a certain percentage of the sale price every time the property is subsequently sold. Typically around 1 percent, the fee is attached to the property title in a manner similar to a deed restriction or other encumbrance.
 
Similar fees are sometimes assessed on condominium transactions to fund ongoing improvements or maintenance within the development. The new fees, however, simply provide an ongoing revenue stream to those who developed the property.
 
Proponents of the fees, also known as capital recovery fees, say they’re an innovative way to attract investment for new development in a largely frozen home construction market. They say they help make new housing more affordable by spreading the cost of development and infrastructure over time, rather than bundling it all into the upfront cost of a new home.
 
Opponents, which include the National Association of Realtors (NAR) and American Title Association (ATA), say such fees merely drive up the cost of buying a home and reduce equity while providing no real service or benefit to homeowners.
 
The new legislation, called the Home Equity Protection Act of 2010, was introduced in the House of Representatives by Rep. Maxine Waters on Wednesday. It would follow the lead of 18 states that have already banned or restricted such fees, including Arizona, California and Florida, whose housing markets were particularly hard-hit in the economic downturn.
 
The Federal Housing Finance Agency has also proposed a rule that would prevent Fannie Mae and Freddie Mac from insuring or purchasing mortgages that include provisions for such fees, which would effectively ban them from most home transactions. They still might apply to upper-end homes whose prices exceed Fannie Mae and Freddie Mac conforming loan limits, though.
 
The fate of the legislation is unclear, given that Congress is already in recess for the November election, and that only a short lame-duck session will remain before the new Congress is seated in January. But both sides are gearing up for the fight: a group calling itself The Coalition to Stop Wall Street Home Resale Fees has been organized to push for the ban, while developers and investors are calling their group The Coalition to Preserve Community Funding.

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