FHA Is Proposing Ban on Transfer Fees the FHFA Rejected — and It’s Still a Bad Idea

The Community Associations Institute (CAI) is opposing a proposed rule that would prohibit community associations from collecting transfer fees on the sale of units in their communities. Sound familiar? It should.The Federal Housing Finance Agency (FHFA) – the primary regulator for Fannie Mae and Freddie Mac – proposed the same rule but ultimately withdrew it when CAI argued that a blanket restriction on transfer fees was unnecessary and potentially devastating to the thousands of home owner associations that rely on the fees to supplement income from owner assessments. Now, the Department of Housing and Urban Development (HUD) is once again proposing to ban all transfer fees and CAI, joined by other real estate industry trade groups, is mounting the same arguments in an effort to defeat the measure.The FHFA rule would have prohibited Fannie Mae and Freddie Mac from purchasing mortgages on properties subject to transfer fees triggered when they are sold. Because the two GSEs purchase close to 90 percent of all residential mortgages, CAI estimated that more than 11 million condominium owners living in communities that imposed the fees would have been affected by the rule, unable either to sell their units or to refinance their existing mortgages.The HUD/FHA rule targets a smaller though still significant segment of the market – loans insured by the FHA. Because they permit lower down payments, FHA loans have become an increasingly popular option and sometimes the only alternative for low- and moderate-income borrowers unable to qualify for conventional financing. During the depths of the housing downturn, when conventional financing had all but disappeared, FHA loans represented close to 70 percent of all mortgage loan originations, according to some industry estimates.Nearly 80 percent of the condominium associations responding to a recent CAI survey said they impose transfer fees and 60 percent said they have done so for 10 years or more. Approximately the same percentage (63 percent) said their fee is $250 or less and 30 percent said they would have to increase assessments by more than 5 percent if the transfer fees were barred. All said they use the fees to offset operating expenses, increase services to owners and/or supplement their reserves.“No Factual Basis”HUD contends that the fees violate an amendment to the National Housing Act intended to prohibit policies that either impede the ability of buyers to assume existing mortgages or limit the proceeds retained by owners who sell their homes. But the transfer fees imposed by condominium associations don’t really have that effect.In a pre-comment letter (submitted before HUD has actually requested comments on the proposed rule), CAI contends that there is “no factual basis” for concluding that community-based transfer fees are inconsistent either with HUD rules or with the public policies underlying them.“Transfer fees are an integral part of an association’s ability to achieve financial stability in delivering services to its homeowners,” the association argues. By enabling associations to expand the services they offer owners and reducing the need for increases in common area fees or special assessments, the letter asserts, transfer fees strengthen condominium association finances, thereby “promot[ing] marketability and protect[ing] market value.” This benefits sellers, by increasing the selling price of their units, and lenders, by protecting the value of the property securing the loan, CAI points out.The concern about limiting the sale proceeds retained by sellers is also unwarranted, according to CAI. In the association’s recent survey, 51 percent of the associations responding said buyers pay the transfer fee; only 15 percent said sellers pay the fee, with the remainder reporting that the fee is negotiated.Important DifferencesThe major problem with the HUD/FHA rule, as with the FHFA rule preceding it, is the failure to distinguish between the transfer fees charged by condominium associations and those collected by developers who impose the fees or investors who purchase securities backed by them. These third party fees have no purpose other than to create a perpetual (99 years in many cases) revenue stream for developers or investors; they provide no benefits for owners, their properties or the communities in which the properties are located. And CAI “unequivocally” opposes these fees for that reason.Unlike third party fees, the benefits of community association transfer fees “flow directly back to the community,” CAI argues. For that reason, the fees meet the legal test for any deed restriction – the direct benefit for the property must exceed the burden imposed on it. “Community transfer fees epitomize this principle,” the CAI comment letter states.The FHFA ultimately bought that argument, when CAI made it four years ago. The agency’s final rule banned transfer fees charged by third parties but exempted fees imposed by condominium associations. Approximately 30 states have adopted laws barring or restricting transfer fees and most have followed that model. Significantly, industry trade associations that have led the campaign to prohibit transfer fees have joined CAI in urging the FHA similarly to carve out an exclusion for condominium associations.The American Land Title Association, the Institute of Real Estate Management, the Mortgage Bankers Association, the National Association of Home Builders, the National Association of Realtors and CAI all co-signed a letter asking the FHA to “mirror the FHFA’s rule and prohibit only those fees that don’t benefit the homeowner and the association.” A conflicting rule would “cause confusion in the housing market,” the letter notes, and would require community associations to obtain owner approval to amend their governing documents ― difficult at best for most associations and impossible for many of them. “We continue to believe that the FHFA’s final rule on transfer fee covenants establishes a clear, national standard to protect homeowners from equity-stripping private transfer fees while preserving the preeminence of state and local governments over land use standards,” the letter states.Why HUD and the FHA are covering the same ground the FHFA has already covered isn’t clear. Nothing has changed since the FHFA proposed its rule four years ago, except perhaps that transfer fees have become more important to more communities in the interim. The FHFA received more than 4000 comment letters on its rule, most of them echoing CAI’s concerns and restating the association’s central argument: Third party transfer fees are unconscionable and should be banned; community association fees are essential and should be preserved. Presumably, HUD’s proposed rule will evoke a similar response and (we hope) produce the same conclusion. But as CAI and its allies prepare to re-fight a fight they’ve already won, you have to wonder why HUD doesn’t just read the 4,000 letters the FHFA received rather than inviting another 4000 (or more) that will say the same things.