New Rule May Ban GSEs from Investing in Mortgages with Transfer Fees

The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) wants to restrict ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com from purchasing mortgages with private transfer fee covenants, also referred to as Wall Street home resale fees.

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These fees are sometimes worked into the language of home purchase contracts, and require that a percentage of the sale price be paid to the original owner of the property every time the property is sold, typically for 99 years.

Edward DeMarco, FHFA's acting director, said ""The private transfer fee covenants appear to run counter to the important mission of the housing GSEs to increase liquidity, affordability, and stability in the nation's housing finance system. Encumbering housing transactions with fees that may not be properly disclosed may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages on those properties.""

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FHFA has issued a notice of proposed guidance to the _Federal Register_, that would ban Fannie and Freddie from purchasing or guaranteeing mortgages and securities that have the controversial home resale fees attached to them. The guidance would also extend to home loans and securities purchased by the Federal Home Loan Banks or acquired as collateral for advances.

Although proponents of the private transfer fees advocate that they are beneficial when used to fund projects that enhance community investments, FHFA says it is concerned that “the fees fund purely private streams of income for select market participants and do not benefit homeowners.”

In addition, FHFA says the fees expose lenders, title companies, and secondary market participants to risks from unknown potential liens and title defects.

A coalition of industry groups, including the American Land Title Association, National Association of Realtors, and the Center for Responsible Lending, among others, have ""launched a grassroots lobbying campaign"":http://dsnews.comarticles/coalition-to-stop-wall-street-home-resale-fees-gains-momentum-2010-07-06 to ban Wall Street home resale fees nationwide.

The financial scheme has already been restricted in 16 states. The ""Federal Housing Administration"":http://www.fha.gov (FHA) has also said it will not insure home loans that include transfer fees.

FHFA is seeking public comment on its proposed ban on home resale fees for the next 60 days before finalizing the new rule.