Put yourself in the position of one of your buyers: they’ve just had a $200,000 offer accepted on a new home, and now they’re finguring out how much cash they’ll need for closing. They discover that, on top of costs like a loan origination fee, prepaid interest, reserves, and title insurance, they also need to pay as much as $2,000 for a mysterious something called a private transfer fee.
The buyer doesn’t get any services in return for the fee; the money simply increases the profits of the subdivision developer and his investors. But the buyer can’t avoid paying it: it’s part of a covenant that runs with the land: any time the property is transferred between parties, the developer gets another one percent of the sales price. You can imagine how unhappy the buyer would be!
Private transfer fees of this type have become more common in newly-built subdivisions and condominium complexes. However, in the last few years, people have realized these fees don’t serve a useful public policy purpose and, in fact, are an unfair restraint on alienation. Right now, almost 40 states ban the fees. Washington’s legislature, for instance, limited private transfer fees in early 2011. Note that these fees are still legal in California (although they must be disclosed), and they are allowed in FHA loans.
Now the fight against private transfer fees has moved to the national level. While Congress hasn’t banned them outright, the Federal Housing Finance Agency—the agency that oversees Fannie Mae and Freddie Mac—has just issued a rule prohibiting private transfer fees in mortgages that will be sold on the secondary market.
This ban applies to only new private transfer fees—those imposed by covenants created on or after February 8, 2011. Older transfer fees are still allowed. Also, fees are allowed under the FHFA rule if the property owner gets some sort of benefit from the funds. If the fee goes to pay for improvements within the neighborhood, or to the homeowners association or other nonprofit group, then it’s still allowed.
The FHFA restrictions make the future use of private transfer fees highly unlikely. Most loans are intended to be sold on the secondary market, and developers will be hesitant to do anything that will make it harder to obtain financing on the properties that they’re developing.
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