Published on: November 16, 2010
If homeowner associations are feeling a little like the moles in ‘whack-a-mole,’ it’s not hard to understand why. Every time they look up, it seems, condominiums are being ‘whacked’ by federal regulations, which, though aimed at correcting problems in the financial and housing markets, are exacerbating existing problems or creating new ones in common interest ownership communities.
The latest example: The Federal Housing Finance Agency (FHFA) has proposed a rule that would prohibit Fannie Mae, Freddie Mac and the Federal Home Loan Banks from purchasing residential mortgages on properties encumbered by deed transfer fees collected every time the property is sold.
This is no small matter. Fannie and Freddie purchase close to 90 percent of the residential mortgages originated today, and lenders, for the most part, won’t approve loans they can’t sell. The Community Associations Institute (CAI) estimates that about 11 million residences are in common interest ownership communities that have transfer fee covenants; if the fee ban is imposed, those properties would become instantly “unmarketable,” the owners unable either to sell their homes or refinance their mortgages.
That’s why CAI is fighting the FHFA’s proposal and is urging homeowner associations and condominium owners to join in the battle, by asking their Congressmen and Senators “to push the FHFA into substantially altering or withdrawing [it].”
A Gift ¾ for Developers
The National Association of Realtors and other real estate organizations leading the campaign to ban the fees appear to be concerned primarily about the covenants that developers have begun to attach to homes in large residential developments. With a 99-year lifespan, these covenants generate a lifetime revenue stream for developers, while providing no benefits for homeowners or for the communities in which the properties are located.
Citing that objection, among others, the FHFA argues additionally that the transfer fees aren’t disclosed clearly to buyers, often disrupt sales when they are discovered, may impede “the marketability and valuation” of properties, and “appear to run counter to the important mission of [Fannie Mae and Freddie Mac] to increase liquidity, affordability and stability in the nation’s housing finance system.”
CAI doesn’t disagree. In its comment letter to the FHFA, the association says developer-imposed transfer fees deserve the criticism they’ve received and merit “regulatory scrutiny.” The problem with the FHFA’s proposed rule, CAI argues, is that it would apply to all deed transfer fees, including those homeowner associations have used effectively for decades to fund reserves, offset operating expenses, and finance capital improvements.
The primary argument against the fees – that they provide no public benefits ¾ doesn’t apply to homeowner associations, CAI contends. A recent survey of its members supports that assertion. About half the community associations responding to the survey said they have transfer fees, and nearly all of them (99 percent) said the fees, totaling an aggregate of about $3 billion, directly support their communities. If the fees are banned, 60 percent of the communities said they would have to increase assessments on owners to compensate for lost revenue in order to comply with the FHFA’s lending rule.
Many wouldn’t be able to comply, even if they want to; amending an association’s covenants typically requires the approval of at least two-thirds of the owners – a virtually impossible benchmark for most communities to meet.
FHFA officials say they are trying to protect consumers and strengthen the weakened housing market, but the blanket ban on deed transfer fees won’t achieve those goals. On the contrary, as CAI notes in its comment letter, the proposed rule would have a “catastrophic” impact on community associations and condominium owners affected by it and would undermine “the substantial effort being undertaken to stabilize the real estate markets nationwide.”
While CAI is urging the FHFA to exempt community associations from the transfer fee ban, developers, represented by the “Coalition to Preserve Community Funding,” are pushing to block the proposed rule entirely. But the coalition’s primary argument – that the transfer fees actually reduce housing costs by spreading up-front development costs over many years and many properties – is hard to support. It shouldn’t take 99 years to recover those costs; at some point, and probably much sooner than later, the fees simply become a gift that keeps on giving to the developers.
Developers also argue that clearer disclosure of transfer fees to homebuyers, which legislation pending in the House of Representatives would mandate, would address what developers say is the only legitimate concern about them. The obvious response from critics: Making the fees more transparent wouldn’t add the public benefits they lack.
The FHFA is currently reviewing the more than 4000 comments it received on the transfer fee proposal. If pressure from the development community is strong enough, the agency may decide to withdraw the regulation – not a good outcome for consumers generally, but a relief for community associations and condominium owners.
As an alternative, CAI has suggested that the agency hold off on its rulemaking for now, to give state legislatures an opportunity to address the transfer fee issue. Many states – 18 of them at last count – have already enacted legislation barring or restricting transfer fees, and most of those measures exempt fees charged by homeowner associations.
“States should be provided with the appropriate time to distinguish between appropriate fees, such as community transfer fees, and fees that are against the interest of consumers, such as private transfer fees payable to investors,” CAI proposes in its comment letter to the FHFA. If the housing agency decides further action is necessary, it can ban private transfer fees in the future. This approach, CAI suggests “would have the maximum impact on the abuse of such fees with the minimal impact on consumers.”
That seems to be a reasonable suggestion. Whether the FHFA will accept it remains to be seen.
If you would like further information regarding the FHA project approval process, please contact Stephen Marcus at email@example.com or 781-843-5000 (105).