Published on: March 19, 2012

Last week, the Federal Housing Finance Agency (FHFA) published a Final Rule restricting the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Banks from dealing in mortgages on properties encumbered by certain types of private transfer fee covenants. The Rule bears an effective date of July 16, 2012.

The FHFA is an independent agency of the federal government which was established by the Housing and Economic Recovery Act of 2008 (HERA). This agency’s mission is to reduce the risk exposure for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The FHFA explains that the Rule is intended to protect the regulated entities (named above) from exposure to mortgages with certain features that may impair their value and increase risk to the financial safety and soundness of those entities. This Final Rule specifically applies to developers, condominium, cooperative and homeowners’ association restrictions created after February 8, 2011.

The type of “private transfer fee” that was the intended target for the FHFA Rule was typically created by a developer as either a fixed amount or as a percentage (ie 1% of the property’s sale price) and attached to real property in order to allow the developer to continue deriving revenue from that property each time it was subject to a resale. Some developer provisions went so far as to make these private transfer fees continue for 99 years!

The question for my readers is whether or not this FHFA Final Rule will impact the kinds of application fees that have been traditionally charged by all kinds of community associations in connection with the sale of lease of property in their communities. Could communities that have these kinds of application and approval fees in their declarations find themselves ineligible for federal-backed loans? For communities already struggling to find credit-worthy purchasers, this could be a significant setback.

There is an exception under the FHFA Rule as follows: “Excepted transfer fee covenant means a private transfer fee covenant that requires payment of a private transfer fee to a covered association and limits the use of such transfer fees exclusively to purposes which provide e a direct benefit to the real property encumbered by the transfer fee covenants.”

A “covered association” is defined as a nonprofit mandatory membership organization comprising owners of homes, condominiums, cooperatives and manufactured homes.

A “direct benefit” means that the proceeds of a private transfer fee are used exclusively to support maintenance and improvements to encumbered properties and acquisition, improvement, administration, and maintenance of property owned by the covered association of which the owners of the burdened property are members and used primarily for their benefit.

Boards who are currently charging and collecting application, transfer and approval fees in connection with the sale or lease of property must ask themselves whether or not those fees are then being used in accordance with the “direct benefit” language defined above. If they are not, your association members may find they are ineligible come July for federal-backed mortgages as a result. This FHFA Rule does not mean you must stop charging a transfer fee, it may mean that you must ensure that any fees collected are used to directly benefit the encumbered properties. A call to your association attorney to discuss your particular association covenant regarding transfer fees is highly recommended prior to July 16th!

Fur further information please contact Stephen Marcus at smarcus@meeb.com or at 781-843-5000 (x105).