- The Washington Times - Friday, October 22, 2010

Busybody regulators who purport to protect consumers often do so by limiting consumer choice. One example is a rule proposed by the Federal Housing Finance Agency.

On Oct. 15, the FHFA closed the public comment period on its proposal to prohibit Fannie Mae, Freddie Mac and all the Federal Home Loan Banks from investing in mortgages that include an increasingly common feature called private transfer fees (PTFs), or capital recovery fees. As these federal entities effectively guarantee 90 percent of the home-mortgage market, this prohibition threatens to kill PTFs as a viable financing mechanism.

Some developers use PTFs to help pay for infrastructure costs such as roads, sewer and power hookups in new subdivisions where municipal services previously didn’t operate. They provide a way to spread those costs over time by charging a 1 percent fee, payable to the developer, each time a home is sold or resold for 99 years. Without this financing option, developers say, those huge infrastructure costs would need to be paid upfront by the initial buyers of new homes, making them prohibitively expensive.

“It’s a very plain-vanilla instrument of financing,” Joe Alderman, managing partner of Freehold Capital Partners, told The Washington Times. “It is becoming more the norm than the exception in master-planned communities.” Whatever the merits or drawbacks of these fee arrangements, they represent a free-market solution to the lack of liquidity in today’s housing market. The FHFA, by contrast, released a statement describing PTFs as “encumbering housing transactions … [that] fund purely private streams of income” and that may not be “proportional or related to the purpose for which the fees were to be collected.” Hence the proposed ban.

As has become the norm under the Obama administration, regulators are moving ahead of elected representatives. Rep. Maxine Waters, California Democrat, has introduced a bill to ban PTFs, which isn’t going anywhere. Rep. Phil Gingrey, Georgia Republican, is pushing more reasonable legislation to require increased transparency regarding these fees so homebuyers know what they’re getting. The Gingrey bill wouldn’t restrict the market, but illuminate it.

The industry reports that 12 million homes have PTF covenants. These houses would become hard to sell if the rule is adopted, and new developments could grind to a halt. This would increase unemployment among construction workers and equipment suppliers and limit options for homebuyers. Most of the country has a housing glut, but some areas are growing. “Our school system grew by 7.6 percent just last year and we’ve got a tremendous need for new housing units,” explained Auburn, Ala., developer Ab Conner. “Without PTFs, we’re at a point where we can’t get typical bank financing to do these types of projects. … It would extend the current crisis that we have and continue the spiral downward.”

The FHFA should withdraw its proposed rule and let the market and elected lawmakers grapple with the issue.