Congress may soon weigh in on a controversial technique for financing the capital costs of new housing developments, with Rep. Maxine Waters, D-Calif., introducing legislation that would prohibit the collection of private transfer fees on all federally related mortgage loans.

The Federal Housing Administration has already said it won’t insure loans encumbered by private transfer fees, and federal regulators have started a formal process that would ban Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in loans backed by homes that carry the fees.

Private transfer fee covenants typically allow a third party, such as a developer, to collect a fee equal to 1 percent of a property’s sale price every time its sold. The covenants are often in place for as long as 99 years.

Congress may soon weigh in on a controversial technique for financing the capital costs of new housing developments, with Rep. Maxine Waters, D-Calif., introducing legislation that would prohibit the collection of private transfer fees on all federally related mortgage loans.

The Federal Housing Administration has already said it won’t insure loans encumbered by private transfer fees, and federal regulators have started a formal process that would ban Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in loans backed by homes that carry the fees.

Private transfer fee covenants typically allow a third party, such as a developer, to collect a fee equal to 1 percent of a property’s sale price every time its sold. The covenants are often in place for as long as 99 years.

Supporters say the fees allow developers to spread out the expenses of capital improvements over the life of a project, instead of forcing the original buyers to pay the entire cost.

A coalition of real estate industry groups including the National Association of Realtors and the American Land Title Association (ALTA) is campaigning for a federal ban on the fees, saying they deprive homeowners of equity, harm property values, and create the grounds for legal disputes that threaten smooth property transfers.

In taking the first step to ban the fees in August, officials with the Federal Housing Finance Agency said they are concerned that the fees are being used "to fund purely private continuous streams of income" and that their expanded use "poses serious risks to the stability and liquidity of the housing finance markets."

Now Waters has introduced legislation, HR 6260, to amend the Real Estate Settlement Procedures Act (RESPA) to prohibit transfer fees and covenants in connection with the sale of homes purchased with any federally related mortgage loan.

Waters’ bill, introduced Wednesday, has been referred to the House Financial Services Committee.

ALTA welcomed the bill, calling private transfer fees "predatory instruments" that force homeowners to "pay a premium for the right to sell their own property."

ALTA noted that 18 states have already passed their own restrictions on the use of private transfer fees.

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