Transfer Fee Covenants and Homeowner’s Associations



In August 2010, the Federal Housing Finance Agency (FHFA) proposed “Guidance on Private Transfer Fee Covenants” (No. 2010-N-11) that would prohibit Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from purchasing mortgages with private transfer fee covenants.  A private transfer fee is charged each time a property subject to such a covenant is sold.  The fee is typically calculated as a percentage of the property’s sales price.  These covenants are commonly used by homeowner associations.

FHFA’s stated reason for this decision was that these covenants “appear adverse to liquidity, affordability and stability in the housing finance market and to financially safe and sound investments.”  FHFA was further concerned with the private income streams created by these covenants and whether all of the money collected was used for the stated purpose of the fees.  Another concern was with disclosure of the fees since they can be hidden with other closing costs at the time of sale of a property.  FHFA was also concerned with harm to the valuation of properties encumbered by these private transfer fee covenants.


Potential Advantages of the Guidance

The proposed guidance might provide benefits by reducing the prevalence of or entirely eliminating private transfer fee covenants.

The proposal would lead to more transparency for homeowner association fees.  When paying homeowner association fees each year, most homeowners probably fail to consider that part of the cost of running the association each year is paid by private transfer fees.  Assuming that homeowner associations want mortgages on properties within their associations to be eligible for purchase by one of the FHFA-regulated entities, the associations would no longer be able to hide part of the cost of running the association in transaction fees paid by only a few homeowners each year.

The proposed guidance could also lead to increased liquidity in the market for homes currently covered by private transfer fee covenants.  These transfer fees increase the transaction costs of each property sale.  Reducing the transaction costs involved with property sales would increase the number and frequency of sales.


Potential Disadvantages of the Guidance

The guidance could lead to problems for the homeowner associations that rely on these fees to fund their operations.  Homeowner associations are not operated to make a profit; over long periods of time, they should spend approximately the amount of fees that they collect.  While private transfer fees may fund a small portion of homeowner associations’ budgets, if these fees are prohibited, homeowner associations will have to adjust their operations.  One possibility would be that homeowner associations would reduce their activities.  However, assuming that homeowner associations were efficiently spending association fees and only engaging in necessary activities, reducing activities to compensate for lost revenue might not be possible.  Instead, homeowner associations would likely replace lost revenue from private transfer fees by increasing homeowner association fees for every property owner in the association.

While increasing fees on every homeowner within the association would provide more transparency, homeowners are not likely to appreciate a sudden increase in their homeowner association dues.  In a time when many homeowners are struggling to make mortgage payments, these increased dues could lead to an increase in foreclosures since many states allow foreclosures to collect homeowner association dues.  Long term homeowners in associations might come to miss the subsidy provided by fellow association members who do not hold their properties for as long of a time.

Since many homeowner associations want mortgages within their communities to be eligible to be purchased by FHFA-regulated entities, the proposed guidance would greatly reduce the use of private transfer fee covenants nationwide.  This area might be better regulated by states that can take into account factors specific to their states.  Many states have already passed laws prohibiting private transfer fee covenants.  For example, Illinois recently enacted Public Act 96-1345 which makes private transfer fee covenants recorded after January 1, 2011 void and unenforceable.


The public comment period for the proposed guidance ended last month.  While the FHFA is yet to announce a decision, the proposed guidance will likely be adopted because the trend in some states and Congress is towards eliminating private transfer fee covenants.