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Source of Title Blog

U.S. Congress Addresses Transfer Fee Covenants
by Robert Franco | 2010/10/01 |

Two competing federal bills were introduced to regulate private transfer fee covenants.  One protects homeowners, and one protects greedy Wall Street profiteers.  Both seek to amend the Real Estate Settlement Procedures Act to accomplish their goals. 

Source of Title Blog ::

The American Land Title Association recently released a press release commending U.S. Representatives for introducing legislation to protect homeowners from private transfer fee covenants - The Homeowner Equity Protection Act of 2010.  The bill, sponsored by U.S. Representative Maxine Walters, would prohibit private transfer fees "if the transfer for which the transfer fee is imposed involves a federally related mortgage." 

Further, it provides that "no provision of State law or regulation that imposes more stringent limitations on transfer fees or transfer fee covenants shall be construed as being inconsistent with" this prohibition. 

To date, 18 state legislatures in Arizona, California, Delaware, Florida, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maryland, Minnesota, Mississippi, Missouri, North Carolina, Ohio, Oregon, Texas and Utah have recognized the dangers of Wall Street Home Resale Fees and have restricted their use.  And, the Federal Housing Finance Agency has issued a guidance that would prevent Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from investing in mortgages with these fees.

A press release from the Coalition to Stop Wall Street Home Resale Fees states that "while traditional covenants have an accepted and beneficial role in the housing market by benefiting the land, Wall Street Home Resale Fees are predatory legal instruments that threaten American homeowners by forcing them to pay a premium for the right to sell their own property."

“The Home Equity Protection Act of 2010 is a strong step forward that would help consumers across the country, preventing unwarranted and spurious increases in the costs of homeownership,” said Evan Fuguet, Senior Policy Counsel at the Center for Responsible Lending. “Unlike conveyances that support the community, affordable housing or the environment, these private transfer fees have no added benefit for homeowners and home buyers, and are reminiscent of the irresponsible fee-packing behavior we witnessed during the heyday of abusive subprime home lending ."

I completely agree with ALTA, the Coalition to Stop Wall Street Home Resale Fees, and the Center for Responsible Lending.  I would very much like to see the Homeowner Equity Protection Act of 2010 pass.  However, it is not the only new bill addressing this issue.

U.S. Representative Phil Gingrey has introduced The Homebuyer Enhanced Fee Disclosure Act of 2010.  This is basically a lifeline to Freehold Capital Partners, and a dangerous one for Americans

The Gingrey bill states that:

Congress finds that transfer fee covenants represent an important economic tool with the potential to make homeownership more affordable and benefit local communities by positively restructuring the economics of real estate transactions by apportioning certain infrastructure and overhead costs over time.

Sounds like it was written by the Freehold marketing team, doesn't it?  The bill basically just requires a notice to be filed in the county recorder's office... where the covenants are already recorded.  It does require a boldface title, "Payment of a Transfer Fee Required," and some other information about the covenant.  But it is pretty much useless - it still doesn't ensure that any homebuyers would ever get actual notice!

Now for the dangerous part.  "A transfer fee covenant that imposes a transfer fee of not more than 1 percent of the gross sales price for the affected property, effective for a term of not more than 99 years," and complies with the disclosure requirements, "shall be presumed to be valid."  I'm sure it is no coincidence that this presumption would apply to the Freehold covenants.

Unlike the Waters' bill, which allows for more stringent state regulation, the Gingrey bill does not!  This opens the dangerous door to preemption of state law which could mean that the Freehold covenant may be valid - even in states which have already banned them.  I'm sure this was part of the plan.

I wonder if Gingrey really intends to stomp on states' rights?  After all, 18 states have already said that these covenants are harmful to their citizens.  I'm sure more state bans are in the works, too. 

And, it isn't just the states that Gingrey is thumbing his nose to - does he realize that the Coalition to Stop Wall Street Home Resale Fees includes veterans, labor unions, real estate investment organizations, and consumer rights groups?  That is a pretty diverse group of potential voters.  And, if anyone knows of any organizations that are in favor of private transfer fees, please let me know. 

The following groups are members of the Coalition:

  • Center for Responsible Lending
  • Vote Vets
  • National Association of Realtors (NAR)
  • Institute for Liberty
  • Consumer Federation of America
  • Property Rights Alliance
  • Americans United For Change (AUFC)
  • American Land Title Association (ALTA)
  • American Federation of State, County, and Municipal Employees (AFSCME)
  • National Real Estate Investors Association
  • Service Employees International Union (SEIU)
  • US Action
  • Labor Council for Latin American Advancement
  • Transport Workers Union
  • Office & Professional Employees International Union (OPEIU)
  • Massachusetts Affordable Housing Alliance
  • International Federation of Professional and Technical Engineers (IFPTE)
  • Georgia State Trade Association of Nonprofit Developers
  • Hawaii Advocates for Consumer Protection
  • Interfaith Housing Center of the Northern Suburbs

We know the argument that Freehold keeps making - the opposition to their covenants is coming from trade organizations that have a vested interest in protecting their fees.  Even if that argument had any validity, how do they explain Vote Vets, the Center for Responsible Lending, The American Federation of State, County, and Municipal Employees, The International Federation of Professional and Technical Engineers, etc? The only organization out to protect their fees is Freehold. 

But if that isn't enough... the Gingrey bill does even more for Freehold specifically.  The Gingrey bill provides that "no property shall be subject to more than one transfer fee covenant."  Guess who has a patent pending on the private transfer fee model?  Yup, it is Freehold.  Since the Freehold covenant is typically filed before a new subdivision is developed, that would mean that not even legitimate homeowners' associations would be able to add a transfer fee covenant! 

So, the Gingrey bill could mean that Freehold's covenants are valid even in the states that have banned them, Freehold gets a monopoly on transfer fee covenants, and their covenants are presumed to be valid under federal law.  Might as well call this "The Guaranteed Riches for Freehold Capital Partners Bill of 2010." 

Though the bill states that "transfer fee covenants represent an important economic tool," it appears that Rep. Gingrey is the only tool involved in this bill. Hopefully, our representatives will see through this ridiculous bill.  We need our representatives to represent us - not greedy profiteers on Wall Street.  Haven't they learned that yet?

We need to let our representatives in the federal government know that the Waters' bill, The Homeowner Equity Protection Act of 2010, is the bill they need to pass.  It is the only one that protects homeowners from equity stealing covenants and it preserves the states' rights to pass more stringent legislation.




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Categories: Legislation, Mortgage Industry, Title Industry

1842 words | 4609 views | 7 comments | log in or register to post a comment


Rep. Gingrey's Bill is About Choice: Rep. Waters Bill is About Denying Consumers a Choice

Our understanding is that a number of interested parties, including developers and others in his state, went to Representative Gingrey.  We have never met with or talked to him or his staff, though of course we applaud him for H.R. 6332. Representative Gingrey is well respected, and he sits on the Committee for Commerce, Trade and Consumer Protection.  I think few would dispute that he cares about commerce, trade and consumer protection – all three of which are balanced by his bill, which provides consumers with the information they need to make an informed choice without destroying what a great many see as a fair and equitable way to fund infrastructure.  Here is what othes have said...

 

  • "When developers in our state impose a transfer fee as a means of recovering significant capital improvements, they can reduce the up front costs to the purchaser, negative equity is eliminated, projects become viable, homeownership becomes more affordable, and jobs are created.  When a developer can sell off this future income stream, project liquidity can be restored, bank debt can be paid down, and jobs are created.  This has a positive ripple effect throughout the community."  Texas Representative Richard Raymond, in letter to FHFA (Sept. 01, 2010).  http://www.fhfa.gov/webfiles/16725/73_Richard_Pena_Raymond_Rep_Tex.pdf

 

  • "Private transfer fees, a relatively recent financing tool, are a way to bankroll multimillion dollar development concessions without necessarily affecting a home’s initial purchase price.”  Jim Sanders, Sacramento Bee (May 21, 2007)

 

  • "To the extent the existence of a [transfer fee impacts the value of property, as long as the fee is fully disclosed the market will adjust to the fee.(-Cal. Senate Staff Analysis.  April 17, 2007).

 

  • "You can’t put all of the costs on homebuyers and still sell at an affordable price." California Building Industry Association.  Source:  BUILDERS, REALTORS SQUARE OFF ON TRANSFER FEES. May 16, 2007. Inman News.

 

  • "If builders weren’t allowed to pass along costs in a transfer fee, they’d have to make up for it by adding thousands of dollars to their homes’ initial selling price, shutting out buyers." California Building Industry Association.

 

  • "Transfer fees represent an alternative to other financing mechanisms that can affect home affordability."  California Building Industry Association.

 

  • “Reconveyance financing ... helps keep home prices low by spreading costs over all beneficiaries of a project.” Julie Snyder.  Policy Director for non-profit Housing California.

 

  • "REALTORS never complain that a house is too expensive, and that’s precisely what happens when builders lump all of their costs into the price of the first home.  Why shouldn’t the second and third buyers share the costs?”  - California Building Industry Association.

 

There is a tremendous segment of the population that sees transfer fees as a fair and equitable way to provide consumers with very real choices about how they pay for infrastructure and other improvements. 

 

I realize that the title industry, like you, is decidedly AGAINST giving consumers a choice.  After all, not only have you made your own position clear (that since you know what’s best for consumers, they definitely should not be allowed to make their own decision), but the title industry has always been about denying consumers a choice, monopolistic cartels, price fixing, government protection at the expense of homeowners and more.

 

 In virtually every state, consumers have no choice when it comes to title insurance.  In most states, every company charges the same rate, and there is no competition, an anti-competitive situation which has been accomplished wth tens of millions in lobbying dollars. In other words, there is NO CONSUMER CHOICE.  Unlike ALTA's attack on transfer fees, the foregoing isn't just a bunch of self-serving rhetoric lacking a factual basis. Just google title insurance choice fleecing etc., or, better yet, just look at the book:

 

The American Title Insurance Industry: How a Cartel Fleeces the American Consumer

http://www.nyupress.org/books/The_American_Title_Insurance_Industry-products_id-5124.html

 

This is just one of many sources, including CNN, Money, Forbes, etc., that have highlighted the massive equity theft we know as the title insurance cartel.  This industry is NOT driven by competition, consumer choice or adding value.  Instead, it is driven by lobbying dollars, cartels, and a complete absence of choice.  For the title insurance industry to say that transfer fees strip equity is the ultimate hypocrisy.

 

When it comes to transfer fees, some very intelligent, well meaning, pro-consumer people actually prefer giving consumers the right to make informed decisions.  Clearly you are not in that camp, which is fine – but not everyone believes that they need someone like you and ALTA to make their decisions for them.

 

Regarding your post, you asked how Freehold explains the "coalition" that the special interest groups (ALTA and the NAR) put together.  The explanation is easy.  The Coalition has crafted an easy populist message:  it just happens to be untrue.

 

ALTA says that the fee “lines a developers pocket”, “provides no benefit to the land”, is "hidden inside complex documents that run hundreds of pages" and “strips homeowners of their equity”.  Who would support a fee like that?  I certainly wouldn’t… and I'll bet I could build a coalition based on those premises. In other words, this is ALTA doing what ALTA does best:  misleading the public and the policy-makers in order to protect their fees.

 

In reality, streets, utilities, wastewater lines, etc., all clearly benefit the land. Reimbursing developers for these capital improvements is not a windfall, and it does not “line the developers pockets”. Instead, it allows buyers to pay less (and indeed the market forces the price lower, as the critics concede), and it spreads infrastructure costs. (Refer back to the quotes above).

 

As to the fee being “hidden inside complex documents running hundreds of page”, this too is more of ALTA’s efforts to say something other than “protect our fees”.  Closings can obviously contain a hundred pages of documents (with the loan itself running into 40 or 50 pages in some cases), but the transfer fee instrument itself is a stand-alone document, boldly titled, and typically consists of very few pages. There is nothing HIDDEN about it.  If it were hidden, how would it ever get paid?  What investor would buy a “hidden fee”.  Its nonsense.  In addition, doesn;t this alleged "problem" go away with a disclosure bill?  Of course it does.

 

ALTA alleges that the fee "strips homeowners of equity".  Bizarrely, they also argue that the fee supresses home prices.  Which is it?  How does it lower home prices yet still strip consumers of their equity?   If true, it would be an amazing feat of economic alchemy. 

 

On the other hand, as the above book clearly explains, ALTA is the expert when it comes to equity stripping and influence peddling.   They strip equity by the billions, dwarfed only by the Realtors.  The reality is that studies prove (not "speculate" - but "prove") what logic tells us:   no one will pay the same price for a home with a transfer fee as they would for the same home without a fee.  If you get a lower purchase price, how is equity stripped?  The answer, of course, is that it isn't.  It is only "stripped" when you pay unnecessary fees in return for no offsetting reduction.  (Think:  Realtor Commission and Excessive Title Premium).

 

In fact, even the NY Times article concluded with a quote from the homeowner that she had no problem with a transfer fee, and would just negtoiate a better price.

 

Unfortunately, ALTA, with the help of the spin-doctors at Hildebrand Strategies, are constantly posting bogus articles masquerading as legitimate public opposition, and they have crafted an easy message about “Wall Street Fees” and “greedy developers”.  Its just like your phrase about "greedy profiteers".  Clearly you haven't looked up the word profiteer. It means one who makes an excessive profit from a scarce good.  It is meaningless in the context of this debate, but  doesn’t it sound nice and populist… who cares if its accurate…

 

The inescapable reality is that consumers ALWAYS have a choice about whether or not to pay a transfer fee.  If they prefer to pay 100% of the costs of infrastructure up front, and to finance these costs, and to then pass them along to the next buyer, then numerous choices abound.  On the other hand, if the price they pay today is acceptable to them, considering the future fee they will pay when they sale, then it seems rather arrogant of you to say that you are so much smarter than they are, and therefore you should decide that deny them a choice “for their own good”.

 

 
by J.B. Alderman | 2010/10/02 | log in or register to post a reply

Choice?

I like to watch TV.  And I have always been irritated that when my favorite shows go to commercial break, the volume is so much louder than the show I was watching.  I know why they do it - money.  They want to get more attention, so they turn up the volume.  I guess I have a choice, I can watch a different network.... but, the shows I want to watch aren't available on any other network.  I guess I could just choose to watch other shows, but all networks seem to do this.  I guess my choice is just to not watch TV.  Not really much of a choice is it?

Thankfully, Congress recently passed the Commercial Advertisement Loudness Mitigation Act (CALM).  Its about time!

I guess it is strange, really, but that is very similar to the choice presented to consumers with private transfer fees.  If a developer places a private transfer fee covenant on a new subdivision, what choice does a homebuyer have?  I guess they could choose to buy in another subdivision, but it seems to me that if a developer can get a future revenue stream (or cash up front if these ever get securitized) for doing nothing more than filing a document in the recorder's office, all new subdivisions will soon have them.  One of these days, you will have to buy a 99 year old home, or rent - not really much of a choice, is it?

If you really want homebuyers to have choices, the only real choice is the Waters' bill - don't let homes get burdened with a 99 year transfer fee that does nothing for the homeowner.  Let them buy any home they like without having to worry about owing thousands of dollars to some long-dead developer, or some investor on Wall Street. 

Funny how title insurance keeps getting demonized to make Freehold's point.  It seems as if the argument is "two wrongs make a right."  But there are flaws with the comparison.  First, title insurance isn't always required.  A homebuyer could get a loan from a local bank that keeps their loans; some will still loan money with an attorney's title opinion.  Around here those can be obtained for about $200.  But, granted, most lender's do require title insurance.

In Ohio, a loan policy on a $500,000 home would be $1,550.  The transfer fee on a Freehold covenant would be $5,000.  That is a pretty big difference.

Eighteen states have already declared that these covenants are harmful to homeowners, and the real estate market.  The danger with the Gingrey bill is that the state's could lose the right to make that decision. 

Nice try, but your argument is still not convincing.  I understand your desire to make a profit for doing nothing, but it is wrong to do it at the expense of every future owner of the property for 99 years.  There is something inherently wrong with charging a fee to to people whose great grandparents may not yet even be born. These people aren't even alive yet, so someone has to protect their interests - that would be what the 18 states with bans have already done, and it would only be strengthened with the Waters' bill.  Here's to hoping it passes!

 

 
by Robert Franco | 2010/10/03 | log in or register to post a reply

Private Transfer Fees

I sent an e-mail that that uninformed Congressman from Georgia (using my former Georgia address), wherein I stated that this is one of the most unfriendly consumer bills I have ever seen, and where did he get such a bright idea.

Let's see if he replies.

More to come.

Donna

 
by Donna McCullough | 2010/10/04 | log in or register to post a reply

Tortured Logic...
Robert- I'm not sure many people will find persuasive your argument that DENYING consumers a choice is somehow GIVING them a choice. Similarly, your implication that developers will somehow be able to go back and put these fees on existing subdivisions, is of course an impossibility. Once a development is sold, the developer cannot go back and add a transfer fee to the deed restrictions/covenants, as you well know. Further, you conveniently ignore the fact that these instruments expire after 99 years, thus adding to the already overwhelming pool of homes without a transfer fee. You then suggest that spreading multi-million dollar development costs over future beneficiaries is "get[ting] a future income stream for doing nothing", which simply highlights the weakness of your argument. Developers spend millions installing long-term infrastructure, and recoup those costs over time, by assessing those who use the improvements. If you do not wish to pay for improvements that way, but prefer to pay 100% up front, and to finance those costs, and to then pass them along, few would argue with you. The issue is your desire to stop anyone else from having the choice. You then write (incorrectly) that 18 states have declared these covenants harmful. So, California rejecting a ban in favor of disclosure is a finding that a transfer fee is harmful? and Texas doing the same. and Mississippi. and 10 other states that rejected bans. The bans, many of which were rammed through quickly and without debate, are more a testament to lobbying dollars than sound public policy or open debate. After the stunning losses in California and Texas, ALTA and the Realtors moved into a pattern of avoiding as much debate and discussion as possible. Many of the bills were passed in 48 hours from start to finish, based solely on the merits as presented by ALTA, arguably one of the most anti-consumer groups out there today. You argued that "title insurance is not always required" when getting a mortgage. Are you serious? When you have to start pointing to less than one tenth of one percent of the transactions, you are on weak ground. As to the title insurance comparison of $1,500 title insurance premium versus $5,000 to the developer. you ignore three significant points: 1. The title insurance premium has a 97% gross profit margin. (read the book cited above) . these excessive fees are dictated NOT by the market, but by legislation that gives consumers no choice in the premium. This is why the title industry is often referred to as a "cartel". They use the legislative process to avoid free market competition on pricing. 2. The developer spent millions installing the infrastructure; and 3. The homeowner PAID LESS UP FRONT. If you pay $10,000 less up front, and saved in interest costs and carrying costs. you are not down by $5,000.00 Providing full disclosure, which the Gingrey bill accomplishes, ensures that homeowners make a voluntary decision about the home they buy, and thus have the opportunity to negotiate their price and terms accordingly. Your efforts to "protect" future homeowners thus becomes nothing more than a transparent expression of your desire to make other peoples decision for them...  
by J.B. Alderman | 2010/10/05 | log in or register to post a reply

So, Donna used her former address...
So, Donna pretended to be a constituent, by giving a false address, in an effort to object to a bill that gives consumers a choice about how to pay for infrastructure, and which ensures full disclosure... 
by J.B. Alderman | 2010/10/05 | log in or register to post a reply

You are missing the point...

Further, you conveniently ignore the fact that these instruments expire after 99 years, thus adding to the already overwhelming pool of homes without a transfer fee.

That is the point.... if developers can get paid for simply filing a covenant on a new subdivision, they will all be adding them to their new developments.  One of these days, the only choice a homebuyer will have is to buy a 99 year old home or pay the transfer fee.  Not really the choice most want.

People want to the choice to buy the home they like best - the one in the nicest neighborhood, the one in the best school system, the one with the cool wrap around front porch, etc... What ever it is that homeowners want, they don't want to have their choices limited by which ones have transfer fee covenants attached to them.

The Gingrey bill isn't about disclosure... it only requires a notice filed in the public records, where these things are already required to be filed.  It certainly does not ensure that any homeowner will get actual notice.  All it really does is give you and your cronies a second chance to argue that your covenants are valid because this federal law may preempt state law. 

Your argument just doesn't work mathmatically... if you are taking a cut of the transfer fee (30%, I believe I read somewhere), then someone must be losing something somewhere along the line.  If these transfer fees were supposed to pay for the development, the developer should be getting the money... but when you factor in your fee and whatever the fees are to securitize them and provide a return for investors, clearly you are taking more out than the developer puts in.

I also have an issue with the "discount" the homeowner gets when they buy.  I don't think a fair price can be calculated.  In an open market prices are already openly negotiated and appraisals can vary from appraiser to appraiser (especially in a market like we have now).  So, when the buyer asks for his discount and the developer says "I already factored that in to the list price," who is really going to know if they are really getting an appropriate discount. Adding this layer of complexity just makes it that much more likely the buyer will get screwed.

Like I said... nice try.

 
by Robert Franco | 2010/10/05 | log in or register to post a reply

There's a lot of bad information on all sides here...

Especially when you're trying to base arguments on a book written by someone who never knew a thing about title insurance before he started researching for his book contract, and uses data that is simply wrong at best (and wrong-headed at worst).

1. Title insurance premiums do not have a 97% gross profit margin.  While only about 3% may be placed into reserves, the rest go to maintaining title plants, paying salaries, covering losses, etc.  And before anyone brings up the books quoted "5% traditional loss ratio", you should research current losses - now between 12 and 15%.  On top of this, these ratios are paid by insurance companies that are already only getting about 15% to 20% of the actual premium, and the remainder is retained by the agents who actually realize 90% of the costs in the business.  Ask any long time agency owner and they will tell you, the profits in title insurance are pretty slim when you compare them to everyone else's.

2. If you pay $10,000 less up front, you're likely going to have to sell for $10,000 less (relatively speaking, after appreciation) later, on top of the $5,000 transfer fee.  In fact, it really doesn't matter what you initially pay, or what you ultimately sell for, you still have to pay the transfer fee out of your proceeds - even if you're not getting less equity in the long run, that's still what it looks like to the seller who just got $5,000 less from his home sale than he expected.

Finally, the elephant in the room that no one is talking about is the fact that most builders practically own every step of their supply line anyway.  Even if their long term infrastructure improvements run into the millions of dollars, the vast majority of those dollars are simply circulating through their own ledgers - they're paying themselves for their own labor.  This is what is so amazing about all the talk about transfer fees and RESPA's required use provisions - everyone gets bogged down on $1,000 here and $5,000 there, when in fact a builder's ultimate profits run far, far higher than any of the distractions being talked about.  If you want to find a cartel, that's where to look.

 
by Title Guy | 2010/10/13 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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