Tuesday, September 21, 2010

FHFA Proposes Action Targeting Private Transfer Fee Covenants

A recent proposal by the Federal Housing Finance Agency (FHFA) aimed at curtailing the use of private transfer fee covenants could have a devastating impact on any community that collects fees upon transfer of lots or homes in the community to fund beneficial programs and services for the community.

If adopted in its present form (see http://www.federalregister.gov/articles/2010/08/16/2010-20108/private-transfer-fee-covenants), the FHFA proposal would restrict Fannie Mae and Freddie Mac and all federal home loan banks from purchasing mortgages on properties in communities with "private transfer fee covenants."

While we believe the primary target of this proposed action (and a recent surge in state legislation on the same subject) is a rise in activity promoting use of transfer fee covenants to create an income stream for the primary benefit of developers and the promoter, the FHFA proposal would broadly construe the term "private transfer fee covenant" to include essentially any kind of fee that is payable on future transfers of the property and designed to generate income, regardless of who collects the fee or the intended use of the fee. This would include communities with covenants that provide for collection of such fees as contributions to working capital or capital reserves, for community enhancement, or to fund community councils or other nonprofit entities organized to promote cultural, educational, environmental conservation, historic preservation, and similar purposes.

If your community is considering or already has a transfer fee covenant in place, it could be adversely impacted if the FHFA proposal is adopted -- even if you haven't started collecting the transfer fee yet.