Bankers' Trillion-Dollar Crime Scene

Wall Street Attaching 1% Transfer Fee to Real Estate Sales, Mandating That Every Seller Pay the Fee to Investors Each Time the Home Sells

Foes want the Obama administration to ban a 1% 'private transfer' charge — assessed every time a property is sold for 99 years — paid to investors who backed the home's original builder.

August 8, 2010

Los Angeles Times - Can you name a housing controversy that pulls Iraq and Afghanistan veterans, consumer advocates, labor unions representing transport workers and government employees, the title insurance industry, the National Council of La Raza, libertarian and property rights groups, and the National Assn. of Realtors all together into a protest coalition demanding quick action from the Obama administration?

A more unlikely collection of real estate bedfellows is hard to imagine. Yet at the end of July, 11 groups with widely divergent agendas and memberships formed something called the Coalition to Stop Wall Street Home Resale Fees.

The target of their protest: private transfer fees being attached as liens on homes and requiring successions of property owners to pay a fee every time the house or lot resells during the coming 99 years. Though proponents say the concept helps real estate developers raise capital for projects by bringing in Wall Street investors, critics contend the liens amount to a perpetual money machine that lowers equity values for unsuspecting consumers and complicates real estate sales.

Here's how the plan works.

Say you buy a $300,000 house in a subdivision where the developer is participating in a private transfer fee program and has recorded liens on every lot. When you later sell the property, you will be required to pay a fee of 1% of the price you receive. The money must be disbursed out of the closing proceeds and sent to a trustee representing investors. Those investors fronted cash to the developer in exchange for the right to receive streams of payments for decades as individual houses sell and resell.

So, if you buy a house this year for $300,000 and resell it for $325,000 a few years from now, you will owe $3,250 at closing. Even if the house drops in value, you will still owe the 1% fee. And if you refuse to pay it, the deal will not close because a lien has been recorded that runs with the title to the property and mandates that every seller pay.

Your purchaser might not like the fee requirement either, and might demand a lower price as compensation. When your purchaser later goes to sell, the same rules will kick in. And so on, through successions of sales until 2109, when the covenant recorded in 2010 disappears. Along the way, assuming modest appreciation in real estate values, investors and their estates stand to reap huge amounts of cash.

In the words of Kurt Pfotenhauer, chief executive of the American Land Title Assn.,

"It's a pretty slick way to make money, but it's bad public policy and bad for consumers."

Pfotenhauer's group and the National Assn. of Realtors have spearheaded drives directed at state legislatures to ban or restrict private transfer fees. But now the focus has shifted to the federal level, where the 11-member coalition wants the Obama administration to prohibit transfer fees on all mortgages purchased or backed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

The FHA has already indicated that the fees violate its rules, the coalition said in a July 29 letter to Treasury Secretary Timothy F. Geithner. If Fannie Mae and Freddie Mac, which both operate under federal conservatorship, follow suit, the underlying mortgage-financing fuel that feeds transfer-fee programs effectively will be shut off. Along with the FHA, Fannie and Freddie now account for an estimated 95% of all mortgage financings.

The principal advocate for the private transfer fee concept, Freehold Capital Partners of New York, did not respond to repeated requests for comment. In an e-mail earlier this year, Curtis Campbell, a spokesman for Freehold, said:

"Private transfer fees represent an adaptation in how to pay for development costs" incurred by builders "at a time when funding is not available" to them on "reasonable terms."

On its website, Freehold claims that major real estate development firms controlling "hundreds of billions of dollars in real estate projects nationwide," including some of the "largest, most well respected," have participated in the program. However, the company has declined to identify any of them.

Members of the new anti-fee coalition said they have very specific reasons for joining. For example, Jon Soltz, co-founder and chairman of VoteVets.org, said military families generally move every three years, and have been disproportionately hard hit by the real estate bust.

Because of their frequent moves, "these fees hurt the military more than anyone," he said, and "take advantage of unsuspecting homeowners and buyers."