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.