[Fannie Mae] Proposed FNMA Rule Change Could Damage Co-op Prices
Posted by Jonathan J. Miller -Thursday, August 26, 2010, 11:07 AM
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The Real Estate Board of New York sent a email yesterday describing the issue:
A draft rule has been issued by the Federal Housing Finance Agency for comment that would create serious problems for Co-op and Condo buyers. The rule would prohibit Fannie Mae from purchasing loans in buildings where there is a Transfer Tax/Flip Tax. We have spoken to Fannie Mae and have been informed that this is not the current policy, but the Regulators have recommended such a rule and on August 12th a draft was issued for public comment. The link below will give you the details of the proposed rule. We have been informed by Fannie that the primary intent of this proposed rule was not to have this apply to all Co-ops and Condos. Their primary intent is to stop developers from imposing 99 year covenants on new homes that require seller’s to kick back a percentage of the sale price of the home to the developer when the home is sold. They are currently reviewing our concerns and will be back to us shortly, hopefully, with revised language that would correct this serious problem.
The Federal Housing Finance Agency is proposing a guidance for public comment that would restrict Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in mortgages with private transfer fee covenants. The guidance would extend to mortgages and securities purchased by the Federal Home Loan Banks or acquired as collateral for advances, and to mortgages and securities purchased or guaranteed by the Enterprises.
Here’s the kicker:
“The private transfer fee covenants appear to run counter to the important mission of the housing GSEs to increase liquidity, affordability and stability in the nation’s housing finance system,” said FHFA Acting Director Edward J. DeMarco. “Encumbering housing transactions with fees that may not be properly disclosed may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages on those properties.”
WRONG assumption when applied to co-ops.
Flip Tax/Transfer Fees ADD value
For an extensive analysis of the value of certain amenities and the relationships between co-ops and condos, take a look at my foray into academia a few years back: The Miller Samuel – New York University joint research paper called The Condominium v. Cooperative Puzzle: An Empirical Analysis of Housing in New York City. The paper was published by the Journal of Legal Studies at the University of Chicago in the summer of 2007.
We found that almost half of all co-op buildings impose a flip tax/transfer fee. More importantly, flip taxes also appear to be value-maximizing. The existence of a flip tax is associated with a 1.9 percent increase in value.
Loss of Flip Tax/Transfer Fees may impair ability for shareholders to obtain financing
It is a key source of revenue after monthly maintenance charge and special assessments so this could impair co-op owners’ ability to obtain mortgage financing since Fannie is focusing on the ability of co-ops to potential finance capital improvements. In addition, that implies higher maintenance charges to cover reserves. Higher monthly charges places downward pressure on prices.
From the letter, it sounds like REBNY is on top of this and FHFA is aware of the issue, but it would be prudent to contact your Congressman.
UPDATE: One other thought – by damaging the co-op market in reducing values, FNMA would essentially damage the collateral of their existing loans and weaken bank’s already weak capitalization ratios, tightening co-op lending even more. A vicious circle. In addition, the default rate on co-ops has always been LOWER than condos and 1-families. What would be the benefit of damaging a large portion of the housing stock in an arbitrary way based on a ruling that really applies to something other than co-ops?
