An American Land Title Association (ALTA) delegation, which included ALTA CEO Kurt Pfotenhauer, recently met with Alfred Pollard, Federal Housing Finance Agency (FHFA) General Counsel, to discuss private transfer fees. In a follow-up letter to FHFA's Acting Director, Edward DeMarco, ALTA further expressed its concerns that private transfer fees are detrimental to the housing market and urged him to prohibit them on Fannie Mae and Freddie Mac mortgages.
Private transfer fees are created by covenants that purport to run with the land, typically for 99-years, that require the seller to pay a fee (usually 1%) to the original covenantor. Freehold Capital Partners, which has a patent pending on this business strategy, has recently proposed securitizing private transfer fee covenants to provide developers with a one-time cash payment based on the future revenue stream created.
"Consumers are required to pay this fee at the time they sell their property, whether the value of their property has appreciated or fallen, particularly if the property is underwater relative to the mortgage. This will almost certainly amplify the cyclicality of the residential real estate market."
ALTA further pointed out that private transfer fees will have an effect on mortgage costs and will increase losses for mortgage guarantors, like Fannie Mae, Freddie Mac and FHA. They would also "create perverse incentives for the holder of the rights to destabilize the neighborhood so as to create the churn that would maximize the repeated collection of fees."
"These fees provide no service of benefit to homeowners," ALTA claims, "and raise the costs of homeownership. Designed to simply generate additional revenue for a covenantor or investor, these fees place an inappropriate drag on the transfer of property and will not only result in increased costs of underwriting, claims, escrow services and compliance for the land title industry but also decrease the equity built up over time by consumers, possibly rendering the property unmarketable."
In closing, ALTA urged the FHFA to adopt a position similar to the Federal Housing Administration, whose general counsel has confirmed that private transfer fees clearly violate HUD's regulations prohibiting legal restrictions on conveyance and requiring lenders to convey clear and marketable title.