Tuesday, October 12, 2010

CAI, CPCF: Don't ban private transfer fees

Two groups announce support of a fee opposed by federal regulators and real estate industry group. Also see: "Coalition, Congress joins Fed effort to ban private transfer fees on home sales"

by Broderick Perkins
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Deadline Newsroom - CAI, CPCF: Don't ban private transfer fees

Banning private transfer fees on home sales could dam up the sale of some 11 to 12 million properties, according to a major homeowner association group and a new coalition supporting the fees.

That view is in direct opposition to other homeowner advocates and federal regulatory efforts that suggest the fees, attached to new homes, are a burden to both sellers and the housing market.

The Community Associations Institute, representing the interests of homeowner and community associations -- typically condo, townhome and other self-governed communities -- say private transfer fees (PTFs) are a boon to community associations' reserve accounts and community improvement projects.

They say as many as 11 million homeowners could find it difficult to sell their homes if the Feds move forward with plans to ban the fees.

According to the new Coalition to Stop Wall Street Home Resale Fees, builders and developers working with Freehold Capital Partners, sometimes attach to a new home sale deed something called a "private transfer fee" or "property transfer fee" (not to be confused with property transfer taxes).

The charge, about 1 percent of the selling price, typically paid by the seller, bounces back to the developer each time the property changes hands -- for 99 years.

The coalition also says disclosures about the tax aren't always clear.

The Federal Housing Finance Agency (FHFA), concerned that the fees are self-serving and used to fund private continuous streams of income, recently proposed a rule that would restrict federal housing agencies from purchasing mortgages on houses sold with the fees.

The FHFA overseas Fannie Mae, Freddie Mac and Federal Home Loan Banks, each of which plays a key role in the housing finance system.

The coalition says it's not just the exorbitant cost. The developer distributes profits to Freehold, which in turn is attempting to bundle the fees into securities, and sell them on Wall Street. Another deal, not unlike subprime securities, designed to allow investors to cash in on future earnings.

CAI says the fees have been used by community associations for decades to help fund reserve accounts or community improvement projects.

"We agree that private transfer fees should get regulatory scrutiny," said CAI CEO Thomas M. Skiba.

"The problem is that the FHFA regulation would apply to any and all deed-based fees. If implemented as drafted, it would be catastrophic," said Skiba.

Nearly half (49 percent) of the 1,252 communities responding to a CAI survey in September have deed-based fees. Extrapolating from that data, CAI estimates that as many as 11 million homes nationally are located in communities that rely on deed-based transfer fees.

Under the FHFA proposal, these homes would no longer be able to qualify for mortgages backed by Fannie Mae, Freddie Mac or any federal home loan bank, which account for up to 90 percent of all residential mortgages.

In addition, most community associations would be unable to comply with the proposed rule. That's because changing deed restrictions typically requires approval of two-thirds or more of all homeowners, which is difficult to achieve.

CAI says the transfer fees charged by community associations are nominal, ranging from a fixed fee (averaging $750) to a percentage of the sales price (averaging 0.25 percent). Also, such funds have allowed financially strapped community associations keep monthly assessments low.

Another new coalition, the Coalition to Preserve Community Funding (CPCF) says the fees, attached to some 12 million homes, aren't new but have been used more since the housing crisis to give developers a long-term revenue stream to help resolve negative equity, pay down development loans and restart stalled projects.

"There is nothing inherently inappropriate or anti-consumer about private transfer fees, though they have been cast in that light by an aggressive misinformation campaign by the National Association of Realtors and the American Land Title Association (members of the Coalition to Stop Wall Street Home Resale Fees)," said Hilary Richards, a spokeswoman for the CPCF.

Richards said much of the current debate is about proper disclosures -- buyers may not always be fully aware the transfer fee will be due at the time of a future sale. Current legislation, if signed into to law, would change that.

U.S. Rep. Phil Gingrey (R-GA), recently introduced "The Homebuyer Enhanced Fee Disclosure Act of 2010 (HEFDA)" which would require adequate disclosures and require that a notice of the fee be filed with the county recorder.

A few years ago, California adopted a similar standard under California Civil Code 1098.5.

"The proposed legislation provides important consumer protections nationwide by ensuring uniform transparency and disclosure of private transfer fees in all relevant real estate transactions, while preserving a valuable mechanism for spreading infrastructure costs, reducing negative equity, and making home ownership more affordable," says Richards.

"Further, the required disclosures help professionals, such as title agents and Realtors, to easily identify the fee through ordinary diligence and allows homebuyers and sellers, by being better informed, to factor the PTFs into their negotiations for a fair sales price," she added.

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.

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1 comment:

Thomas M. Skiba said...

Unfortunatly Mr. Perkins has conflated two very different positions.

As CAIs recent 20+ page comment letter to the FHFA clearly states, we share their concerns that allowing transfer fees that benefit self-serving investors creates risk to communities, homeowners, and the real estate market.

However, (and this is where we have an issue) we are concerned that FHFAs broad wording of their proposed rule would impact associations and homeowners negatively as it would ban community-based transfer fees along with the private transfer fees that are being advanced by Freehold.

There is one critical difference though:

Community-based transfer fees have been used for more than 30 years to fund required community reserve funds, capital improvement initiatives, and other activities within the community. These funds remain in the community and benefit the community at large as well as individual homeowners directly.

Private transfer fees, such as those advocated by Freehold, are a very recent "innovation" and are nothing more than a mechanism to extract equity from a community, lower home values, and inject another unneeded level of risk into an already struggling residential real estate market.

CAI and our 30,000 members support the approach that has been taken in numerous states already to ban fees that enrich investors while still allowing communities to retain fees that remain in and benefit the community. In fact, this is the essence of a recent bill introducted by Rep. Maxine Waters.

Hope this clears up some of the confusion.

Tom Skiba
Chief Executive Officer
Community Associations Institute