FHFA Prohibits Transfer Fees

Transfer fees are common to real estate transactions in the Poconos.  Two common forms of transfer fees are: 1) buyer-paid fees to a home owners association (HOA); and 2) seller-paid release fees to prior owners, often referred to as a release of first right of refusal.  In some transactions, both fees apply.  

A third type of transfer fee being implemented in some markets around the country is a fee payable to the developer or builder, established by covenant in land subdivision or title documents.  This private transfer fee is receiving scrutiny from regulators and attorneys-general in a number of states.  Now private transfer fees are in the crosshairs of the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae, Freddie Mac and the Federal Home Loan Bank.
   
The following excerpt is from an FHFA press release - March 15, 2012 (underlining added): 
  

Washington, DC – The FHFA has sent a final rule to the Federal Register on private transfer fees. The final rule limits Fannie Mae, Freddie Mac and the Federal Home Loan Banks from dealing in mortgages on properties encumbered by certain types of private transfer fee covenants and in certain related securities.

The final rule excludes private transfer fees paid to homeowner associations, condominiums, cooperatives, and certain tax-exempt organizations that use private transfer fee proceeds to benefit the property. 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. With limited exceptions, the rule applies only prospectively to private transfer fee covenants created on or after Feb. 8, 2011. Covenants created before that date would be excepted from the rule.

A summary from the Rule regarding of excepted transfer fees:

• HOA transfer fee proceeds are deemed "to benefit the property" because the funds are utilized by the HOA to fund common improvements and costs.  HOA transfer fees are therefore excepted under the Rule.  
• First Right of Refusal fees.  Under the Rule covenants created prior to 2/8/2011 are excluded.  Since most of the first right of refusal reservations found in Pocono subdivisions were created prior to 2/8/11 they are not affected by the Rule and therefore permissible.

It should be recognized that the Rule does not prohibit private transfer fees from being instituted or charged.  The Rule effects Fannie and Freddie, restricting them from taking a security interest (mortgaging) a property encumbered by an unexcluded private transfer fee obligation.  From a practical standpoint such restriction would render a property as unmortgageable from a conventional financing perspective.  


New mortgage underwriting guidelines may be issued soon for property subject to private transfer fee reservations.  Such guidelines will likely require certification of effective dates and identification of third-party interest holder for any pre-existing transfer fee reservations. 

FHFA - Stealth Tax Increase

Washington DC 12/29/11. FHFA Acting Director Edward J. Demarco announced today an increase of “no less than 10 basis points” in the guarantee fees charged by Fannie Mae and Freddie Mac (GSEs). The increase is part of the recently enacted “Temporary Payroll Tax Cut Continuation of 2011”. Effective April 1, 2012 through October 1, 2021, the increase will effect residential mortgage financing.  Guarantee fees are paid to the GSEs and held in reserve.  Going forward the increase will be remitted directly to the US Treasury.

Extending the 10 basis point increase over the FHFA’s current book of business translates into  $5.7 billion in additional transaction costs to be borne by the already challenged housing finance sector.  The 10 basis point increase is not a fee for a service or a product, it is a tax plain and simple - money taken from the private sector and paid to the US Treasury.  

Full text of FHFA Demarco statement.

Robo-signing Repercussions? FHFA takes action...

FHFA Directs Fannie and Freddie to Adopt Uniform 
Improvements to Foreclosure Attorney Networks

Washington, DC –The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to transition away from current foreclosure attorney network programs and move to a system where mortgage servicers select qualified law firms that meet certain minimum, uniform criteria.  

Fannie had essentially black-listed some attorneys in the months following the foreclosure moratorium.  Now Big Daddy FHFA is laying down some new "uniform improvements" to rein in the attorney selection process.  Fannie publishes its updated "Mandatory Retained Attorney List", where on occasion one can observe deletions, suspensions or ineligibility status.

Although details of FHFA's direction for "uniform improvements" has not been released, it would appear that the head office wants to take a stronger hand in that selection process.  Given the GSE's previous cronyism this is probably another step in the right direction

Full Press Release

Good News! from Fannie & Freddie

We don't get much in the way of good news these days from the financial sector.  But in a report out today from the Federal Housing Finance Agency (FHFA) there are some definite glimmers of sunshine.  The report is entitled "Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2009 and 2010", and it reads like its title, wonkish and energy-depletingly bland. 

Before we look at the report a bit of background explanation is required.  

Loan quality is categorized according to key credit risk characteristics.  For decades Fannie and Freddie (GSEs) operated under "plain vanilla" underwriting guidelines.  That meant that from an investment / risk standpoint one GSE loan was pretty much akin to another.  Then in the late 1990s the GSEs transitioned to a Basking-Robbins'-31-flavors approach to underwriting as guidelines were expanded to define a greater variety of acceptable risks, which in turn led to a stratification of loans by product type and risk class.  Here the concept of risk-layering was employed to recognize multiple risk factors as may exist among the variety of loan flavors within the GSEs' loan portfolios.  

The good news today in the referenced report is not in the formulations, or how many basis points are being charged in guarantee fees.  It is to be found in the statistics the report analyzes. 

About 20 pages into the report are found tables listing statistics on the risk characteristics of new loans originated over the past four years.  First, a profile of loans by product type and risk class shows the following positives signs:

• significant increase in 15 year mortgages;
• dramatic improvement in credit score quality;
• substantially higher equity position (lower LTV).  

Next is a chart profiling loans based on layered risk factors:

• No Risk Layering originations are up;
• Cash Out Refis are down;
• Decrease in Subordinate Financing;
• Low-doc and Interest-only loans all but eliminated;
• Increase in HARP refinances.

The increase in HARP, Home Affordable Refinance Program, refinances is a positive in that those loans are replacing higher-cost loans for at-risk borrowers, greatly reducing the likelihood of a future default.

From a consumer standpoint these statistics describe borrowers who are better qualified and increasingly conservative.  Such a trend is good news for the housing market already overstocked with REO and distressed homeowners.  Though the economic challenges of high unemployment and limited business growth continue, perhaps we have were a sign that the overall landscape is leveling a bit from a default perspective.

From the investor perspective more good news.  There is consensus that the Baskin-Robbins-style underwriting of the prior decade played a significant role in the problems at Fannie and Freddie.  Hindsight is 20/20 and we now know that offering only "plain-vanilla" was key to the long-term stability of the GSEs.  

In the 1970s "foreign cars" became increasingly popular as the American car-buyer became increasingly dissatisfied with the poor quality of domestic cars.  Eventually US car-makers got the message, retooled and made improvements.  Now it looks as if a portion of the US financial sector is heeding a similar message.  The indicators contained in the referenced report point to an improvement in overall loan quality, with greater security and reduced risk.   So perhaps just like Ford with its 1980's slogan "Where quality is Job #1", Fannie and Freddie have retooled their production lines.  

Returning confidence to investment markets is badly needed. Let's hope that Fannie and Freddie can emulate Ford in this too, that they stabilizeg financially without further government bailout.  

Fannie / Freddie Wrap 3rd Year in Conservatorship

How time flies!  It's hard to believe three whole years have passed since the US Treasury stepped in and took over Fannie and Freddie.  Three years of insolvency, delinquent mortgages, trial mortgage modifications,  robo-signed foreclosure complaints, underwater homeowners and short sales.  Three years of Realtors navigating seismic shifts in the real estate landscape with falling home values, board-ups and growing inventories.  How time flies indeed.

Happy Anniversary!

So it's been three years - the traditional gift for a third anniversary is leather.  Seems like it would be easy to think of a few entities or individuals who deserve getting some good leather, perhaps not of the gift-wrapped variety, but rather in swift delivery across their respective backsides.  But in looking for culprits who really is at fault?  

How about Wall Street and the derivative guys selling toxic assets repackaged as private-label securities.  Or the top-dogs at Fannie and Freddie who orchestrated special insider accommodations and promoted Pollyannaish loan programs in countervention of the tenets of prudent lending.  Or public policy-makers in DC who sought to check off items on their social agenda to-do lists by exploiting influence over the GSEs and financial institutions.  Then there are the mortgage companies, loan originators, appraisers, sales people, builders, developers, all of us "in the loop" who feverishly pumped transaction volume at record pace through the bulging pipeline during the heady days of the late boom.  And oh yeah, lets not forget the borrowers who signed the loan applications and nodded their heads to all those qualification questions about income, source of funds, employment, occupancy and the like.  

That's a lot of leather.  But the fact is there is no single cause for the collapse we are now tunneling our way through.  Top to bottom, everybody donned rose-colored glasses and looked to ride the wave of a seemingly ever-expanding market as far as it would go.

We the People...

Since entering conservatorship in 2008 Fannie and Freddie have received over $153 Billion from the US Treasury.  What's that money buying us?  Wiggle room, I guess.  Allowing time to formulate an orderly dismount from the once-noble experiment in public-/private-sector lending, now become a bucking behemoth, officially in its death throes.   Closing short sales and turning over REO inventory we see the micro-deficits as Treasury dollars are doled out dollop by dollop one transaction at a time.    

The good news is that each sale is one unit closer to working our way through.  It's like the old joke - Q: How do you eat an elephant? A: One bit at a time.  My hat is off to everyone in the real estate community as you adapt and reinvent yourselves to serve the American homeowner. It is important to continue the struggle against a flood of challenges and persevere.  Because private property is foundational to a free society and real estate is its cornerstone.  

New Foreclosures Hit Nine-month High

First-time default notices to US homeowners hit a a nine-month high in August with 78,880 filings, according to RealtyTrac as reported in the Wall Street Journal.  The August news is a disturbing indicator.

"The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems," said RealtyTrac Chief Executive James Saccacio. (see prior blog: Foreclosure Freeze) "It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process."

But there's also some good news, or at least better news.  Total U.S. properties in foreclosure fell 33% in August from a year earlier, marking the 11th consecutive month of year-over-year declines.  

WSJ Article - RealtyTrac: August Foreclosure Filings Down 33% on Year

FHFA News Release: "$200 Billion in Recovery Excessive"

Washington, DC - The FHFA is seeking financial recovery from recently filed lawsuits according to its press release today.  It went on to say, "at this time, it would be premature and potentially misleading to estimate the size of any potential recoveries" and that "press reports that FHFA is seeking nearly $200 billion in damage are excessive." 


Full Press Release