GSEs Prohibited From Purchasing Mortgages With Private Transfer Fees

By: Krista Franks Brock 03/15/2012

The Federal Housing Finance Agency (FHFA) released its final rule regarding private transfer fees Thursday. After reviewing the 4,200 comments it received in response to its proposed guidance, the FHFA is issuing a rule that restricts Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from taking on mortgages “encumbered by certain types of private transfer fee covenants and in certain related securities,” the FHFA stated Thursday.

Private transfer fees, also known as Wall Street home resale fees, require property owners to pay either a fixed amount or a percentage of sale price when they sell their property. These fee covenants are often enacted by property developers or homeowner associations and may be effective for terms of 20 years or 99 years after construction.

The FHFA is allowing some exceptions to its rule. When private transfer fees go to homeowner associations or other organizations that use the fees “to benefit the property,” the rule will not apply.

On the other hand, “Fees that do not directly benefit the property are subject to the rule, and would disqualify mortgages on the property from being sold to Fannie Mae or Freddie Mac, or used as collateral for Federal Home Loan Bank advances,” FHFA stated in its final rule.

The GSEs and the Federal Home Loan Bank have until July 16 to enact the rule, which will apply “with limited exceptions” to transfer fee covenants created after February 8, 2011, the date the FHFA released its proposed rule.

In its proposed rule, the FHFA expressed concerns mirrored by many throughout the industry-“that private transfer fees may be used to fund purely private continuous streams of income for select market participants” and that they “may not benefit homeowners or the properties involved.”

In addition to the question of whom the fees are benefiting, many throughout the industry are concerned with how the fee covenants are managed and disclosed to homeowners.

“Private transfer fee covenants create myriad problems for consumers and lenders alike,” the American Land Title Association (ALTA) said in its response to the proposed rule last fall. “When attached to a property, these fees infect every part of a real estate transaction, including the insurance of a mortgage.”

In fact, the ALTA points out that the Federal Housing Administration has refused to insure mortgages with private transfer fee covenants since 2010.

Often, transfer fees do not apply to the initial purchase and thus are not recorded at the time. When the homebuyer later sells the property, the transfer fee often comes as a surprise, according to the FHFA.

Unpaid transfer fees result in liens preventing properties from being sold.

In its final rule, the FHFA made clear that it is not prohibiting private transfer fees in the market, but instead it is instructing the GSEs that purchasing or investing in properties that hold private transfer fee covenants “is an unsafe and unsound practice in which they shall not engage.”