U.S. out to curb resale fees
that could linger for 99 years
By Aaron Kessler
Published: Monday, September 20, 2010 at 1:00 a.m.
THE FEDERAL GOVERNMENT IS moving to curtail a growing practice of developers quietly inserting so-called "resale fees" or "private-transfer fees" into residential covenant documents.
The fees, being pushed by a New York-based finance company as a way for developers to raise money, force a percentage of the sales price, generally 1 percent or more, to be paid every time the home is sold -- for nearly a century.
In other words, every time a home is sold, over and over for 99 years, the 1 percent fee would have to be paid -- with the proceeds going back to the original developer and the firm who helped broker the fee provision, Freehold Capital Partners.
Freehold is then selling securities backed by the fees, which it has been marketing to investors like Wall Street bankers, pension funds and endowments.
So for example, a home that sells for $400,000 would have a $4,000 resale fee assessed. If the new owner sold 10 years later for $600,000, another fee, this time for $6,000, would be required. And so forth. For nearly 100 years.
Freehold has been pushing its resale fee strategy since at least 2007, back when it was headquartered in Texas under the name Freehold Licensing. About a dozen states, including Florida, already have moved to ban or restrict the fees as they have proliferated across the country.
Now, the federal government is signaling its own willingness to curtail the fees nationwide. The Federal Housing Finance Agency has issued "proposed guidance" that if finalized would prohibit Fannie Mae and Freddie Mac, as well as the other Federal Home Loan Banks, from buying up any mortgages involving properties with such fees included as part of their convenants.
The FHFA announced last month that the restrictions would apply to all mortgages and securities purchased by the government-sponsored entities, known as GSEs, as well as those acquired as collateral or guaranteed by them.
"The private transfer fee covenants appear to run counter to the important mission of the housing GSEs to increase liquidity, affordability and stability in the nation's housing finance system," said FHFA Acting Director Edward J. DeMarco, in a statement. "Encumbering housing transactions with fees that may not be properly disclosed may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages on those properties."
Since the GSEs are involved with an overwhelming percentage of all home loans in the United States, the proposal would essentially act as a de facto ban on the majority of the transfer fees. The FHFA stated in its announcement that it was "concerned that the fees fund purely private streams of income for select market participants and do not benefit homeowners."
Meanwhile, states have been taking their own steps to combat the resale fees. The latest is Michigan. Earlier this month, Michigan State Rep. Paul Opsommer introduced legislation to outlaw the resale fees, calling them "utter nonsense that strips away hard-earned equity from homeowners."
The Florida Legislature was ahead of the game, acting back in 2008 to pass a bill aimed at prohibiting what Freehold Capital Partners, then going by Freehold Licensing, was doing in Texas and had begun exporting to Florida.
According to a 2008 report by the American Bar Association, the Florida Legislature's action was described as moving "to prevent a transfer scheme originating in Texas from taking root in Florida."
The new Florida statute that took effect in July 2008, Section 689.28, states that transfer-fee convenants violate public policy by "impairing the marketability and transferability of real property."
Freehold could not be reached for comment, but its current marketing brochure defends the fees as a way for developers and builders to raise money in a difficult financial environment, and claims the fees "represent a valuable, fully collateralized long-term income stream with no meaningful risk of default."
Developers can also get their money up front, Freehold suggests in its brochure: "Not only is a long-term income stream a valuable asset, but another compelling part of working with Freehold is the potential for selling the income stream in return for significant capital today."
The company also states that institutions should buy securities backed by the fees, saying they are "an ideal investment opportunity for pension funds, mutual funds, insurance companies, endowments and others seeking long-term income."
Freehold claims the fees make homes more affordable, because,"buyers save on acquisition costs and carrying costs, and since they paid less, they can sell for less."
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