From the HOA Files: HOA transfer fee restrictions
Thought your HOA revenue had stabilized? Think again. Your transfer fees are at risk. Many HOA’s, and/or their management companies, receive transfer fees each time a home is sold. In some cases the transfer fee is mandated by the governing documents. Occasionally a third party, such as the original developer, receives a “deed-based” transfer fee upon the sale.
Last August the Federal Housing Finance Agency (FHFA) proposed to restrict Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in mortgages with private transfer fee covenants. According to the FHFA, “such covenants appear adverse to liquidity, affordability and stability in the housing finance market and to financially safe and sound investments.” As these GSE’s underwrite most bank originated mortgages, the effect of this restriction could have a considerable financial impact on your HOA’s bottom line.
Apparently, there is an increasing use of deed-based fees which a developer receives each time a property is sold, in virtual perpetuity. FHFA is concerned such fees provide a continuous stream of income to a select party and that it is unclear if these fees, even if retained by the association, are proportional or related to the purpose for which these fees are collected. The argument in favor of the fees is that they help offset the development costs or fund new improvements to existing communities.
Should this proposal gain acceptance, any HOA with a deed-based or covenant-based transfer fee would be impacted. Governing documents would have to be amended, requiring at least a 67 percent vote of the owners, to remove the transfer fee; we all know how much fun that would be! Such fees charged by management companies for extra services rendered upon a sale would not likely be effected as these are based on the contract between the association and the management.
The Community Associations Institute (CAI) has officially called upon the FHFA to rescind the proposal, allow time for state and federal legislators to address the issue, and to consider how such fees are actually used by associations. CAI based its comments on a survey of its members. Over 1200 communities from 40 states responded to the survey, with 49% reporting a collection of transfer fees predominantly used to support their association.
Although the public comment period has elapsed (on Oct 15, 2010), CAI encourages its members to reach out to their members of Congress to express concerns on the FHFA proposal. The FHFA has an indeterminate period of time to make their decision.
Murray Bain is a reserve studies provider and HOA consultant. He can be reached at (970) 485-0829, or firstname.lastname@example.org.
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