The present housing and mortgage overload is by some estimates only halfway through its painful cycle, still desperately looking for traction to solve high mortgage foreclosure numbers, underwater homeowners by the millions, home loan providers with books still loaded with toxic paper and persistent oversupply. The complexity and severity of the collapse is testing the skills, creativity and persistence of the public and private sectors alike. Progress has been made on many fronts, but a lot more needs to be done.
While the focus now is largely on turning the pummeled housing and mortgage markets around, a new fee is quietly being introduced to be part of a real estate transaction. Here are the basics of it. Whenever a home sale is closed in the next 99 years, a 1% fee of the price is paid to the original developer or can be split between other parties and investors. The seller pays it to a third-party trustee, and if he doesn't do so, the deal is off. The reason is that a special lien is attached to the underlying land, called a private transfer fee covenant. It stays with any home tied to the program for the set period of time. It has nothing to do with a government transfer tax, HOA fee or environmental protection concerns.
If a home covered by this setup is sold 15 times during this 99 year run, the 1% transfer fee is paid 15 times. That of course generates an inspirational stream of income to the developers and investors at the receiving end. For what, some may ask? From the looks of it there is no economic benefit anywhere in the program, so the sole purpose seems to be to create a 99-year money machine for them. Many real estate industry experts are already calling it a scam or a fancy pyramid scheme. The program is promoted by Freehold Capital Partners out of New York who supposedly have a "patent pending" structure in the works. And its website declares that it has so far signed up partners with real estate projects worth about $488 billion on their drawing boards. That's very impressive, except that none of them are actually named.
The scary part is that Freehold is supposedly in talks with the investment community to securitize bundles of these transfer fees, in other words planning to turn out bonds backed by future cash streams that can be sold to investors. Does that smell like the chopped up subprime mortgage loans shaped into securities no one fully understood that just a few months ago wrecked the home loan industry? Very much so. A good-size red flag right there for the regulators.
Many real estate trade groups, among them National Association of Realtors ( NAR ), National Association of Home Builders ( NAHB ) and American Land Title Association ( ALTA ), aren't convinced that this is the direction to take. There are many pitfalls in the program, besides the money grab. It complicates property transfers by making them uncertain and more costly. The title is clouded for long periods of time and to get releases from the original owners could be impossible. The American Law Institute claims that these transfer fees are "arbitrary, spiteful and capricious" and an "unreasonable restraint on alienation." That's of course lawyer speak. It lowers home prices due to the built-in feature of a fee encumbrance and making them harder to sell.
As of right now, the majority of states have no limits on these types of fees, so housing trade groups against the program are gearing up to spread the word nationwide and stifle its advance. Preferably bury it for good. Home buyers predictably are out of the loop and should be on the lookout for it, specifically asking whether there is a private transfer fee involved when contemplating a real estate purchase.
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