Builders and developers across the country are rallying against a new proposal issued by the Federal Housing Finance Agency (FHFA) that could jeopardize scores of sales at master planned communities nationwide and put the home builders and real estate agents on opposite sides in what could prove a lobbying battle in Washington.
The proposed regulation would prohibit Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from buying mortgages on homes in communities with private transfer fees. A private transfer fee, sometimes called a "flip tax," is a one-time fee paid when a home is sold. Typically the fee, usually a fraction of 1% of the home sale price, in some cases helps fund community homeowner associations or nonprofit organizations.
But in other situations, particularly those in which clients of Freehold Capital Partners are involved, the fee is little more than a opportunity to open a new revenue stream for developers--in perpetuity. Freehold, based in New York, is a real estate financing firm headed by Joseph B. Alderman III, a Texas developer. The firm claims to have signed up more than 5,000 developers as clients who are interested in these fees as a future revenue stream against which they could borrow or sell debt securities. It is this practice from FHFA appears to be attempting to shield the GSEs.
The problem is that the way the FHFA proposal, as it is now worded, does not make a distinction between fees that go to support common infrastructure and homeowner associations and those that go directly to a developer's bottom line. And, if the proposal becomes regulation, could jeopardize sales in master-planned communities.
Bob Sharpe, developer of Rancho Sahuarita, a 5,000-home master planned community in Tucson, Ariz., said the regulatory change would be devastating to his company. "Seems to me 100% of homes sold in our community are government-backed," he said. "If that financing wasn't available, our new and existing home sales would cease."
According to the Community Associations Institute (CAI), there are roughly 305,000 homeowners associations nationwide, representing 24 million housing units and 60 million residents. Preliminary results from a survey of CAI members showed that as many as a third of respondents indicated that they use private transfer fees as a funding source. Final survey results are due out next month, but at that rate, as many as 8 million homes could be rendered ineligible for government financing.
"If the FHFA proposal gets accepted, it's going to bring the housing market--new or existing--to a screeching halt," says Jo Ann Stubblefield, a principal at Hyatt & Stubblefield, an Atlanta-based law firm with experience in creating community covenants and private transfer fees.
Without Fannie and Freddie behind the mortgages, it would essentially be "game over" for much of the housing market, say industry experts. Currently Fannie Mae and Freddie Mac, together with the Federal Housing Administration (FHA), make up approximately 90% of the secondary mortgage market. If they stop investing in mortgages on homes with these private transfer fees attached, primary mortgage lenders will refuse to underwrite the mortgages. Consequently, these homes will be utterly unmarketable, and housing values are likely to suffer.
"We have very serious concerns about what's happening," says Allison Barnett, a legislative advocate for the California Building Industry Association (CBIA). "This is a really big deal in California. These transfer fees are an absolutely essential tool to the real estate community in California."
One of the main arguments behind the new regulation is that private transfer fees artificially raise the cost of homeownership. However, opponents of the regulations say the opposite is true. Private transfer fees help fund things such as environmental mitigation, affordable housing, infrastructure, and community amenities, maintenance, and services that otherwise would have to come directly out of homeowners' pockets, keeping the cost of living in these communities down while maintaining the desirability of living in such communities.
For example, Cort Chalfant, senior vice president of Rancho Sahuarita Company, says the Rancho Sahuarita homeowner association stands to lose roughly $10 million in revenue in the next decade. To be able to make up that funding gap, the community will either have to cut back on amenities and services or increase monthly homeowners' dues. It's a lose-lose situation, he says.
However, some industry stakeholders finger two other motivations for the FHFA proposal. They blame: first, the emergence of new, rarely used type of transfer fee structure that allowed developers to obtain royalties from resales in their communities and, second, a strong lobby from the real estate agent community against the fees, which are believed to infringe on agents' commissions.
Whatever the impetus, many industry stakeholders still feel that the FHFA proposal is far too sweeping. More disclosure requirements, limiting recipients of transfer fees to nonprofits, or even banning transfer fees all together are more palatable alternatives for many than the FHFA's current proposal, which threatens to cut off mortgage financing in communities where such fee covenants exist.
Removing such covenants would not be easy. Most communities require a super-majority of homeowners to agree to change a deed restriction such as a private transfer fee. How likely is that when dealing with large master-planned communities with thousands of homes? "It would be more difficult than amending the United States Constitution," says Andrew Fortin, vice president of government and public affairs for the Community Associations Institute.
Builders and developers opposed to the FHFA proposal are focused on voicing their concerns. The FHFA will accept public commentary on the proposal until Oct. 15, after which it will review the submissions and decide whether to amend the proposal. A spokesperson for the National Association of Home Builders said the group had not yet formulated a policy position on the subject, but expected one within days of a board meeting next week.
Interested parties can register their opinions with FHFA via e-mail at firstname.lastname@example.org with the subject line, "Guidance on Private Transfer Fee Covenants (2010-N-11).
Sarah Yaussi is editor of Big Builder magazine.
Learn more about markets featured in this article: Atlanta, GA.