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.
The mere fact that the covenant has been recorded would severely impact the availability of financing for purchases of lots or units in your community, since many lenders won't lend if the mortgage can't be sold in the secondary mortgage market. In many cases, the covenant cannot easily be amended away and, even if it can, there may be no practical source of alternative funding for the activities and programs that were intended to be funded by these fees.

FHFA is providing an opportunity for public comment before the proposal is adopted. The deadline for submitting comments is October 15th. We are in the process of formulating our comments and are calling upon our clients and others in the industry for assistance in gathering data to show the adverse impact of the proposal in its present form. Our goals are to: (1) help FHFA see the distinction between transfer fees that provide no current or future benefit to the community and those that do; and (2) convince FHFA that any regulation of private transfer fee covenants needs to specifically exempt beneficial transfer fees that are payable exclusively to owners associations, 501(c) organizations, and other nonprofits and are restricted by covenant to use for the current or future benefit of the community that pays them.

Here's what you can do to help:

1. First, we are collecting examples and data to show the benefits of "good" transfer fees and the adverse impacts this proposal would have on communities that use them. Specifically, we need you to let us know if your community collects fees on transfers of lots or units, the size of the community, the amount of the transfer fee, and the purposes to which it is dedicated. We could also use information regarding the average amount collected last year (or in a typical year) and a description of actual activities it has helped to fund. Any data you have regarding how sales in your community have compared to your competition would also be helpful.

2. We encourage you to contact your representatives in Congress (and anyone else you know that could be helpful) to share your comments and concerns regarding this proposal.

3. Spread the word! If you know others who might be affected by this proposal, encourage them to get involved and submit comments as well.

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