Home Sales

Feds seek to ban private transfer fees on home sales

by Broderick Perkins

(08/20/2010) ERATE Exclusive - Uncle Sam wants to put the kibosh on a deed covenant provision that gives builders, developers and others a continuous stake in the property -- a stake that pumps up the cost of a home.

Builders and developers sometimes attach to a new home sale deed something called a "private transfer fee" or "property transfer fee" (not to be confused with property transfer taxes).

The amount, about 1 percent of the selling price, typically paid by buyer, occurs each time the property changes hands.

The Federal Housing Finance Agency (FHFA), concerned that the fees are self-serving and used to fund private continuous streams of income, recently proposed a rule that would restrict federal housing agencies from purchasing mortgages on houses sold with the fees.

FHFA and critics of the fee say, buyers who don't carefully read settlement statements don't realize they are paying the fee. Buyers who do question the cost find there's little they can do to circumvent the fee, short of walking away from the deal -- a drastic approach for only a few buyers otherwise bent on closing.

"A builder or developer should not have the power or authority to essentially levy an ongoing tax for their own private good the way a government entity does for the public good. It seems patently unfair that once title is transferred from a builder or developer to a buyer that there could be an opportunity to profit again from a sale or transfer down the line. This would create a lien or encumbrance which must be fully disclosed to all potential buyers and justified by the builder/developer as having to offset a legitimate expense," said Nancy Osborne, chief operating officer of ERATE, a Santa Clara, CA-based financial information publisher and interest rate tracker.

Proponents of the charge say the beneficiary can be a charity or government agency set up to provide housing for underserved communities.

The money does sometimes go to community or homeowners associations, but more often the cash recipient is the builder or developer.

Against the fee levied against new homes is a group that includes the National Association of Realtors, the American Land Title Association, American Federation of State, County and Municipal Employees, Service Employees Industry Union and the Center for Responsible Lending, which has petitioned to stop what they say is a "stealth tax" that does little more than guarantee a revenue stream for developers or investors without providing benefits to home buyers.

Eighteen states have acted to restrict the fee on new homes, joining the FHFA's proposed rule to oust the fee by preventing its agencies from purchasing or investing in mortgages on houses with the fees are embedded in the covenants. The FHFA overseas Fannie Mae, Freddie Mac and Federal Home Loan Banks, each of which plays a key role in the housing finance system.

"Encumbering housing transactions with fees that may not be properly disclosed may impede the marketing ability and the valuation of properties and adverse the liquidity of securities backs by mortgages on those properties," said FHFA acting director Edward DeMarco.

A public comment period runs 60 days, until about mid-October, after which it's a good bet the agency will pull the plug on private transfer fees.

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