You could hear sighs of relief coming from the Boston Redevelopment Authority (BRA) and thousands of homeowner associations (HOAs) last week when the Federal Housing Finance Agency (FHFA) announced that its new proposed rule on private transfer fee covenants does not affect the fees that HOAs and the BRA collect from homeowners when they re-sell their homes. The details are in this FHFA Fact Sheet (pdf). The proposed rule would limit Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in or purchasing mortgages for homes that are subject to private transfer fee covenants. Analysts estimate that the new rule will affect well more than 50% of mortgages nationwide.
The catalyst for the FHFA’s concern was the practice of some real estate developers who bury private transfer fee covenants deep within their closing documents. These fees – typically 1-2% of the resale price and payable to the developer – often go unnoticed by home buyers. The developers then securitize the projected income stream from these fees in financial products. Sound familiar? It should – this technique mirrors the ill-fated mortgage securitization practice that contributed to the 2008 financial meltdown.
Many HOAs also collect transfer fees from owners upon the resale of their property. However, these proceeds are generally used to fund the associations’ operations and pay for needed infrastructure improvements. Similarly, the BRA collects a 2% resale fee from sellers of certain homes built on land that the BRA previously owned and sold for redevelopment. When the FHFA first proposed its rule, the scope was so broad that it was seen as prohibiting Fannie, Freddie and the Federal Home Loan Banks from guaranteeing loans subject to HOA and BRA transfer fees. See PTF Guidance, 8-12-10 (pdf).
After a public comment period that garnered several thousand comments, the FHFA proposed a new rule that keeps in place the restriction on federal involvement with mortgages subject to transfer fees, but exempts HOA transfer fees that provide a direct benefit to the association. This new rule also protects the BRA’s transfer fees by excluding from the rule’s scope fees “imposed by or payable to the Federal government or a State or local government.” See FHFA Proposed Rule (pdf). There is a two-month public comment period for the new proposed rule. It’s likely the only comment the HOAs and the BRA will be sending along is a big, “Thank You!”