The Federal Housing Finance Agency has banned Fannie Mae and Freddie Mac from guaranteeing loans on homes that carry private transfer fees unless the fees are paid to a home owners association or directly benefit the home owner.

A private transfer fee, also known as a reconveyance fee, is added as a covenant to the deed on each new home a developer sells. So every time the property is sold, often over as long a period as 99 years, the new buyers have to pay the developer a fee equal to a set percentage of the sales price until the covenant runs out.

There is virtually no oversight on where or how fees can be spent, how long a private transfer fee may be imposed, or how the fees should be disclosed to home buyers, said NAR President Moe Veissi. “This often places an inappropriate drag on the transfer of property,” he added.

The rule doesn’t apply to private transfer fees that benefit home buyers and home owners, including fees paid to tax-exempt organizations and those charged by the home owner, condominium, and cooperative associations for funding capital reserves, capital improvements, upgrades, or major repairs.

“FHFA believes that some private transfer fees have a legitimate place in real estate markets and should therefore be exempted from the rule,” Veissi said. “However, FHFA must ensure that the fees paid are reasonable and fully disclosed to home buyers well in advance of closing and that there be some direct benefit to the home owner.”

With limited exceptions, the rule applies only to private transfer fee covenants created on or after Feb. 8, 2011. Covenants created before that date, and those that were created by some agreements inked before that date, would be exempted from the rule, which takes effect in July, FHFA said.

The American Land Title Association says 38 states ban or restrict private transfer fees.

“Unlike fees charged by home owner associations and condominiums cooperatives that directly benefit the property, the fees now excluded are simply designed to generate additional revenue for investors at the expense of consumers,” said ALTA CEO Michelle Korsmo. “These fees provide no service or benefit to home owners, raise the costs of home ownership, and are like a broken ATM machine, giving investors access to home owners’ hard-earned money.”

Source: NAR