This week, Ken Harney released an article on Inman News titled Upcoming FHA Rule Could Squeeze Homebuyers and Sellers. The topic of the article was new rules regarding third party/private transfer fees that FHA is expected to release next month.
According to Harney’s article, “Realtors, lenders and community associations are up in arms about forthcoming FHA rules that they believe could make mortgage financing more expensive – maybe even impossible – for large numbers of buyers and sellers around the country.” (Emphasis added.)
Personally, I like Harney’s articles and was even highlighted in one last month regarding the potential return of FHA spot loans for condos. I also understand the need to write in a manner that attracts people’s attention in order to maintain and increase readership. Harney is nationally-syndicated. I get it.
What particularly bothered me about the article was that it was not only sensationalistic in nature, but it is based almost purely on speculation. The article is riddled with words like "believe", "potentially" and "possibly".
FHA is due to release new guidance for condominium projects regarding private/third-party transfer fees. It has been discussing these changes since at least 2011, when I first learned about them. They are not common in Connecticut and, in fact, I have yet to work with a condominium project that has private transfer fees.
At the HUD round table session that I attended in March 2014, private transfer fees were discussed at length. The attendees consisted of 16 condo project consultants from all over the country.
Joanne Kuczma, Housing Program Officer, discussed that certain private transfer fees are acceptable to HUD. Some homeowner’s associations charge buyers or sellers a set fee. These fees could be to add to the reserve account for future capital expenditures or for administrative work such as to produce resale packages for closings. These fees are typically a set amount and not exorbitant.
The transfer fees with which FHA (and Fannie and Freddie) take issue are those that are tied to the sales price of the unit and are payable to a third party.
I heard an example of this in California. The town in which the condominium resided required that for developments, such as condos, the developer has to set aside and maintain a certain amount of raw land within the property boundaries. One particular developer decided that he would charge a transfer fee to all who purchased within the community and the proceeds were to go to a non-profit agency to “maintain the land”.
This was discussed at the round table session. HUD’s standpoint was that if it was the Association’s responsibility to maintain this raw land, the cost of doing so should be included in the annual budget and, therefore, funded by the HOA’s common charges.
HUD’s concern is that the transfer fees would instead go to the non-profit which is really the recipient of this virtual perpetual money-making machine. One example cited was that a developer set up a non-profit which funded a trust for the developer’s family members and was funded via private transfer fees. Not a bad plan, right?
What was not discussed at the round table were any specific details about the new rules that are due to come out next week. Ms. Kuczma noted that it was illegal for HUD to speak about the potential changes prior to their release. All she said was that the new ruling would be comprehensive and a large document.
Currently, the Condominium Project Approval and Processing Guide has one line about private transfer fees and they are not even referred to by this name. Technically, they are Deed Restrictions as they affect the amount of proceeds retained by the seller at the closing. The Guide says that properties with these types of restrictions are “…usually ineligible for FHA mortgage insurance.”
Personally, I think that FHA has done a nice job of trying to offer affordable loans while mitigating risk to the insurance fund. Obviously, not all of its regulations make great sense (mortgage insurance for the life of the loan comes to mind) but in speaking with the representatives from HUD, I believe that they are really working to maintain this balance.
The bottom line is we don't yet know what the new guidance will dictate so speculation as to its contents and potential to harm homebuyers and sellers is a waste of time.
Puzzled image courtesy of Stuart Miles/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
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Check out our article in Common Interest magazine on page 19!