Federal regulators are moving to ban Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in loans with private transfer-fee covenants, a controversial technique for financing the capital costs of new housing developments.
A coalition of real estate industry groups and consumer advocates is campaigning for a federal ban, saying the fees — which are collected each time a home changes hands — rob homeowners of equity, harm their property’s value, and lay the groundwork for legal disputes that threaten smooth property transfers.
In a notice to be published in the Federal Register, the Federal Housing Finance Agency (FHFA) agreed, saying expanded use of private transfer-fee covenants "poses serious risks to the stability and liquidity of the housing finance markets."
FHFA wants to ban Fannie and Freddie from purchasing or investing in mortgages encumbered by private transfer-fee covenants or securities backed by private transfer-fee revenue.
The Federal Home Loan Banks would not be allowed to purchase or invest in such mortgages or securities, or hold them as collateral for advances.
With Fannie, Freddie and the Federal Home Loan Banks currently playing a role in funding or guaranteeing most mortgage loans, FHFA’s proposed guidance would make it unlikely that developers would want to employ private transfer-fee covenants. Those that did would be unable to sell homes to buyers who wished to rely on a loan backed by the government-sponsored enterprises, or GSEs.
FHFA will accept comments for 60 days after the notice is published before issuing final guidance.
Developers have attached private transfer-fee covenants to properties — typically a percentage, such as 1 percent — that’s paid every time a home is resold, for a period that’s often as long as 99 years.
Freehold Capital Partners, a company that partners with real estate developers to structure a 1 percent "capital recovery fee" into developments, claims the fees spread out the cost of capital improvements over the life of a project, instead of forcing the original buyers to shoulder the entire burden.
FHFA acknowledged that it’s aware of that claim, but said regulators are concerned that the fees "are used to fund purely private continuous streams of income" that may not benefit homeowners.
Even in cases where the fees are dedicated to homeowners associations, its unclear that they are proportional or related to the purposes for which they are collected, FHFA said.
Regulators said they have determined that the typical 1 percent fee "is neither a minimal nor a reasonable amount," and increase the seller’s burden "by a meaningful amount" at the time of a property sale.
That’s a potential problem when loans are securitized into mortgage-backed securities, as the fees "may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages," FHFA said.
Regulators are concerned that such consequences "will have a particularly detrimental effect on still fragile housing markets."
Banning the GSEs from purchasing and investing in such mortgages is a better alternative than simply requiring Fannie and Freddie to report on the extent of their exposure to private transfer-fee covenant investments, changing seller servicer guides to identify restrictions on purchase of encumbered mortgages, or creating and enforcing additional representations and warranties against encumbered mortgages, FHFA said.
The American Land Title Association — which has joined with National Association of Realtors, the Center for Responsible Lending and other groups in opposing private transfer fees — welcomed FHFA’s announcement.
"These fees provide no service or benefit to homeowners, and raise the costs of homeownership," ALTA CEO Kurt Pfotenhauer said in a statement. "The FHFA recognizes they are simply designed to generate additional revenue for investors at the expense of consumers."
According to ALTA, 17 states including Arizona, Oregon, Texas, Florida, Illinois, Minnesota, Ohio and North Carolina have banned or restricted private transfer-fee covenants. California requires upfront disclosure of the fees.