Legal Update: Flip Taxes and Fannie Mae / Freddie Mac
Sometimes government’s attempt to resolve problems unintentionally overreaches, and has an unintended impact. That is the case with a recent round of proposed rule-making from the Federal Housing Finance Agency (the regulators of Fannie, Freddie, and 12 other Federal Home Loan Banks). FHFA was trying to redress abuses by unscrupulous developers (imagine that) who were building and selling homes with 99 year covenants attached that required huge fees to be paid to the developer in connection with any subsequent transfer by the unknowing homeowner. Developers then sold this stream of payments to finance future developments. Clever? Yes, and very deceptive when not clearly disclosed to buyers.
In an attempt to insulate investors from this hidden charge, FHFA proposed rule-making to make ineligible any loan secured by such property. But in writing the rule, they originally swept in any property with private transfer fees on sale. That would have included “flip taxes,” popular with NYC cooperatives and some condominiums which require the seller (or in some cases the buyer) to pay a fee to the housing entity in connection with the transfer.
That effect, was admittedly unintended, and FHFA responded to the uproar from the NYC legal community and has recently amended the rulemaking to exempt fees where the proceeds are used to benefit the property.