[Federal Register Volume 75, Number 157 (Monday, August 16, 2010)]
[Notices]
[Pages 49932-49934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20108]


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FEDERAL HOUSING FINANCE AGENCY

[No. 2010-N-11]


Private Transfer Fee Covenants

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed guidance; request for comments.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to 
issue a Guidance, ``Guidance on Private Transfer Fee Covenants,'' to 
the Federal National Mortgage Association (Fannie Mae), the Federal 
Home Loan Mortgage Corporation (Freddie Mac) (collectively, the 
Enterprises), and the Federal Home Loan Banks (the Banks) that the 
entities it regulates should not deal in mortgages on properties 
encumbered by private transfer fee covenants. Such covenants appear 
adverse to liquidity, affordability and stability in the housing 
finance market and to financially safe and sound investments. This 
proposed Guidance would extend to mortgages and securities held by the 
Banks as investments or as collateral for advances and to mortgages and 
securities held or guaranteed by the Enterprises.

DATES: Interested persons may submit comments on or before October 15, 
2010.
    Comments: Submit comments to FHFA using any one of the following 
methods:
     E-mail: [email protected]. Please include ``Guidance on 
Private Transfer Fee Covenants, (No. 2010-N-11)'' in the subject line 
of the message.
     Mail/Hand Delivery: Alfred M. Pollard, General Counsel, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552, Attention: Public Comments ``Guidance on Private 
Transfer Fee Covenants, (No. 2010-N-11)''.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

FOR FURTHER INFORMATION CONTACT: Peggy K. Balsawer, Assistant General 
Counsel, (202) 343-1529 (not a toll-free number), Federal Housing 
Finance Agency, Office of General Counsel, Fourth Floor, 1700 G Street, 
NW., Washington, DC 20552. The telephone number for the 
Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    FHFA invites comment on all aspects of the proposed guidance, 
including comments on which actions by FHFA would be most appropriate 
to address the concerns posed by private transfer fees. The comment 
period will end on October 15, 2010. Copies of all comments will be 
posted on FHFA's Internet Web site at http://www.fhfa.gov. In addition, 
copies of all comments received will be available for examination by 
the public on business days between the hours of 10 a.m. and 3 p.m., at 
the Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. To make an appointment to inspect comments, 
please call the Office of General Counsel at (202) 414-6924.

II. Background

Establishment of FHFA

    FHFA is an independent agency of the Federal Government and was 
established by the Housing and Economic Recovery Act of 2008 (HERA), 
Public Law 110-289, 122 Stat. 2654 to regulate and oversee the 
Enterprises and the Banks (collectively, the regulated entities). HERA 
amended the Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (12 U.S.C. 4501 et seq.) (Safety and Soundness Act) and the 
Federal Home Loan Bank Act (12 U.S.C. 1421 through 1449) to enhance the 
authorities and responsibilities of the new agency. FHFA's regulatory 
mission is to ensure, among other things, that each of the regulated 
entities ``operates in a safe and sound manner'' and that their 
``operations and activities * * * foster liquid, efficient, 
competitive, and resilient national housing finance markets.'' (12 
U.S.C. 4513(a)(1)(B).)

III. Federal Housing Finance Agency Guidance

    A private transfer fee covenant is attached to real property by the 
owner or another private party, frequently, the property developer, and 
provides for a transfer fee to be paid to an identified third party 
(such as the developer or its trustee) upon each resale of the 
property. The fee typically is stated as a percentage, such as one 
percent of the property's sales price and often survives for a period 
of ninety-nine (99) years.
    FHFA has expressed concerns about private transfer fees in 
congressional testimony and in other public statements. FHFA is 
publishing this Notice in order to receive public comment on this 
proposed draft Guidance.
    Promoters of private transfer fees and their possible 
securitization argue that such fees are beneficial when used to fund 
project developments or to enhance community investments through 
homeowners associations or through affordable housing groups, 
environmental groups, or other charitable organizations.
    FHFA is concerned that such fees are used to fund purely private 
continuous streams of income for select market participants either 
directly or through securitized investment vehicles. Further, it is 
unclear that the fees, even if dedicated to homeowners associations, 
are proportional or related to the purposes for which the fees were to 
be collected. FHFA's draft Guidance is based on the view that 
investments in mortgages on properties with private transfer fee 
covenants and securities designed to generate income from the fees are 
not acceptable for the regulated entities. FHFA's draft Guidance does 
not distinguish between private transfer fee covenants which purport to 
render a benefit to the affected property and

[[Page 49933]]

those which accrue value only to unrelated third parties.
    Encumbering housing transactions with fees that may not be properly 
disclosed and that may limit the alienation of property means that such 
fees may impede the marketability and the valuation of properties and 
adversely affect the liquidity of securities backed by mortgages so 
encumbered. FHFA is concerned that such consequences will have a 
particularly detrimental effect on still fragile housing markets. 
FHFA's position is also influenced by considerations of consumer 
protection where disclosures may be insufficient and add costs not 
fully understood by consumers.
    FHFA recognizes that there is a range of actions it can take, 
including to require the regulated entities to report on the extent of 
their exposure to private transfer fee covenant investments, change 
seller/servicer guides to identify restrictions on the purchase of 
encumbered mortgages, create and enforce additional representations and 
warranties against encumbered mortgages, or to prohibit the purchase or 
investment in the mortgages or the revenue generated by the fees.
    FHFA's draft Guidance directs that the Enterprises should not 
purchase or invest in mortgages encumbered by private transfer fee 
covenants or securities backed by private transfer fee revenue, as such 
investments would be unsafe and unsound practices and contrary to the 
public missions of the Enterprises and the Banks. Likewise, the draft 
Guidance would direct that the Banks should not purchase or invest in 
such mortgages or securities or hold such mortgages as collateral for 
advances.

IV. Proposed Guidance

    The proposed draft Guidance follows:

Federal Housing Finance Agency

Guidance on Private Transfer Fee Covenants

Issuance Date: August XX, 2010

I. Introduction

    The Federal Housing Finance Agency (FHFA) is an independent agency 
of the Federal Government and was established by the Housing and 
Economic Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat. 
2654 (2008) to regulate and oversee the Federal National Mortgage 
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation 
(Freddie Mac) (collectively, the Enterprises), and the Federal Home 
Loan Banks (collectively, the Banks). HERA amended the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 
et seq.) and the Federal Home Loan Bank Act (12 U.S.C. 1421 through 
1449) to enhance the authorities and responsibilities of the new 
agency.
    The respective federal charters of the Enterprises reflect their 
public mission to ``provide stability in the secondary market for 
residential mortgages,'' ``respond appropriately to the private capital 
market,'' ``provide ongoing assistance to the secondary market for 
residential mortgages * * *, '' and ``promote access to mortgage credit 
throughout the Nation * * *'' (see section 301 of the Fannie Mae 
Charter Act and section 301(b) of the Freddie Mac Corporation Act.) 
FHFA's regulatory mission is to ensure, among other things, that each 
regulated entity it supervises ``operates in a safe and sound manner'' 
and that their ``operations and activities * * * foster liquid, 
efficient, competitive, and resilient national housing finance 
markets.'' (12 U.S.C. 4513(a)(1)(B)).

II. Private Transfer Fees

    A private transfer fee covenant is attached to real property by the 
owner or another private party (frequently, the property developer) and 
requires a transfer fee payment to an identified third party, such as 
the property developer or its trustee, a homeowners association, an 
affordable housing group or another community or non-profit 
organization, upon each resale of the property. The fee typically is 
stated as a percentage (e.g., 1 percent) of the property's sales price 
and often survives for a period of ninety-nine (99) years.
    Some states have legislated against private transfer fee covenants 
in all circumstances. Other states permit them only when they benefit a 
homeowners association or community organization or when they have been 
adequately disclosed. Still other states have no position on such 
covenants.
    Proponents of private transfer fees argue that these fees have 
positive effects when the proceeds offset initial infrastructure 
improvements or to fund new improvements to existing communities. 
Further, they argue that payments at the time of a resale are intended 
to reimburse the developers or investors for their initial outlays. At 
the same time, opponents argue that these community goals can be 
achieved through more transparent and equitably distributed assessments 
on all commonly affected property owners. Many covenants are not 
intended for purely community purposes and, instead, create purely 
private continuous streams of income for select market participants 
either directly or through securitized investment vehicles.

III. FHFA Guidance to the Enterprises and the Banks

    FHFA has found that the typical one percent fee at the time of 
resale is neither a minimal nor a reasonable amount; further, such fees 
may be in excess of one percent. Such fees increase by a meaningful 
amount the seller's and potentially the buyer's burden at the time of a 
property sale. Expanded use of private transfer fee covenants poses 
serious risks to the stability and liquidity of the housing finance 
markets.
    Further, FHFA has concerns that private transfer fee covenants, 
regardless of their purposes, may:
     Increase the costs of homeownership, thereby hampering the 
affordability of housing and reducing liquidity in both primary and 
secondary mortgage markets;
     Limit property transfers or render them legally uncertain, 
thereby deterring a liquid and efficient housing market;
     Detract from the stability of the secondary mortgage 
market, particularly if such fees will be securitized;
     Expose lenders, title companies and secondary market 
participants to risks from unknown potential liens and title defects;
     Contribute to reduced transparency for consumers because 
they often are not disclosed by sellers and are difficult to discover 
through customary title searches, particularly by successive 
purchasers;
     Represent dramatic, last-minute, non-financeable out-of-
pocket costs for consumers and can deprive subsequent homeowners of 
equity value; and,
     Complicate residential real estate transactions and 
introduce confusion and uncertainty for home buyers.
    The risks and uncertainties for the housing finance market that are 
represented by the use of private transfer fee covenants are not 
counterbalanced by sufficient positive effects. To the extent that 
private transfer fee covenants benefit unrelated third parties, one 
cannot claim that a service or value is rendered to the relevant 
property owner or community. Even where such fees are payable to a 
homeowners association, unlike more typical annual assessments they are 
likely to be unrelated to the value rendered, and at times may apply 
even if the property's value has significantly diminished since the 
time the covenant was imposed.

[[Page 49934]]

    FHFA regards such purchases as inconsistent with the Enterprises' 
public missions to promote liquid, efficient and stable housing finance 
markets. FHFA does not consider mortgages encumbered by private 
transfer fee covenants to be prudent or safe or sound investments for 
the Enterprises or the Banks. Consequently, Fannie Mae and Freddie Mac 
should not purchase or invest in any mortgages encumbered by private 
transfer fee covenants or securities backed by such mortgages. The 
Banks should not purchase or invest in such mortgages or securities or 
hold them as collateral for advances.

     Dated: August 10, 2010.
Stephen Cross,
Deputy Director of the Division of Federal Home Loan Bank Regulation, 
by Delegation, Federal Housing Finance Agency.
[FR Doc. 2010-20108 Filed 8-13-10; 8:45 am]
BILLING CODE 8070-01-P