Federal Action on Transfer Fee Covenants

Otten Johnson Alert November 2010

In the year since the firm's initial Client Alert about transfer fee covenants (a/k/a "private transfer fees"), the Colorado legislature did not take any action to restrict such fees in the 2010 session; however, the topic has received recent attention in Washington, D.C. Most notably, the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, has issued a proposed guidance that would restrict those entities from purchasing or investing in mortgages on property that is encumbered by private transfer fees.

Private transfer fees are fees imposed by non-governmental entities and are payable on each sale of the affected real property. Typically, the fees are 1% or some other percentage of the purchase price and the requirement extends for every sale over a 99-year period.

The FHFA's proposed guidance would apply both to transfer fee covenants whose proceeds are paid to parties that have no obligation to use the proceeds to improve the property or community (such as those designed by Freehold Capital Partners, which pioneered this type of covenant) and to covenants whose proceeds are paid to entities, such as homeowners' associations, that must use the funds to improve the property or community. Equally important, the proposed guidance would apply not just to properties that have transfer fee covenants imposed after the guidance is adopted but also to properties that are already encumbered by transfer fee covenants. Given these factors and the fact that Fannie Mae and Freddie Mac now purchase the majority of new U.S. residential mortgages from the originating lenders, if adopted, this guidance could (a) greatly restrict the ability of many homeowners to sell or refinance their properties, and (b) impede certain bona fide infrastructure financing mechanisms.

In proposing the guidance, the FHFA asserted that transfer fee covenants (a) increase the cost of homeownership, (b) reduce the transparency of closing costs for consumers thereby diminishing the liquidity and efficiency of the housing market, and (c) expose lenders and title companies to the risk of unknown liens arising from these covenants. The FHFA accepted public comments on the proposed guidance through October 15 and received over 2500 comments.

Separately, two members of the U.S. House of Representatives have sponsored legislation that addresses transfer fee covenants. Last month, Maxine Waters (D., Calif.) introduced the Home Equity Protection Act of 2010, which would ban these covenants. Phil Gingrey (R., Ga.) sponsored a competing bill that would permit such covenants so long as they are accompanied by written disclosures.

Otten Johnson's Real Estate and Land Use practice groups have substantial experience in dealing with issues relating to real estate transfer fees. For more information on this Client Alert or on addressing real estate transfer fee issues, please contact any of the attorneys in the Real Estate or Land Use practice groups (for a listing of the Real Estate practice group, click here, and for a listing of the Land Use practice group, click here).