Federal Rule on Transfer Fee Covenants
During the 2008 session of the Florida legislature, FLTA supported an initiative by the Real Property, Probate and Trust Law Section of the Florida Bar (RPPTL) which prohibited most private transfer fees in Florida. This was intended to eliminate the practice (then being promoted as a business opportunity) of recording a restrictive covenant running with the land requiring the payment of 1% of the sale price on each resale for 99 years to an assignee of the owner who recorded the covenant. In their plans, that future income stream would be sold on Wall Street to make an immediate payment to the landowner. Section 689.28, Florida Statutes prohibited this practice, but left a number of exceptions for innocuous, or socially desirable payments – such as condominium and HOA fees for approving a new owner, fees going entirely to charity, and the like.
By August, 2010, the same group was promoting transfer fee covenants nationally. Many states, at the urging of ALTA followed Florida’s lead in prohibiting them outright. And the Federal Housing Finance Agency announced a proposed rule which would have prohibited Fannie Mae & Freddie Mac from acquiring or insuring any mortgage on property encumbered by a transfer fee covenant. We agree with FHFA that a traditional 1% transfer fee benefitting a private developer does impair their collateral value, and applaud the effort to further restrict these practices, which many consider a fraud on the consumer.
Unfortunately, the initial draft of the rule was so broadly phrased that the required payment to cover a credit or background check of a proposed condominium owner would have constituted an impermissible transfer fee. And every mortgage on a condominium with that requirement in its declaration, would have been non-conforming.
Given current market conditions, we felt that would severely hamper the real estate recovery and worked with the RPPTL Section on comments and suggestions which were embodied in this October, 2010 letter.
Some months later, FHFA circulated a much improved draft for comment. This draft had eliminated most (but not all) of the condominium and HOA payments as impermissible transfer fees, but it still suffered from some technical defects and issues. Once again, Alan Fields worked with the RPPTL Section to assure that our issues and concerns were properly presented in this April 2011 letter.
While we applaud the concept, and agree with the narrowing of the scope of the rule, we fully expect lenders and others to shift the burden to the land title industry by requiring that we identify and point out impermissible transfer fees to them as part of each loan transaction. Depending on how broadly the rule is drawn this could substantially change the way we conduct our searches and prepare our policies. We will keep you posted as this develops further.
After a long period with no visible activity, the final version of the rule was released on March 16, 2012. Like earlier versions, this prohibits Fannie, Freddie and the Home Loan Banks from purchasing, investing in or otherwise dealing in any mortgages on properties encumbered by private transfer fee covenants or securities backed by such mortgages. The definitions go into great detail, but it is important to note that the application is limited to covenants created on or after February 8, 2011.