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Wall Street Journal: Developments Blog: Battle Over Home Resale Fees Heads to Congress

October 1, 2010

By Robbie Whelan

Opponents of a newly-designed fee attached to the sale of homes have succeeded in getting the ear of Congress.

On Thursday, the Coalition to Stop Wall Street Home Resale Fees, an advocacy group representing special interests in the real estate title and brokerage industries, sent around a statement applauding Congresswoman Maxine Waters and several other congresspeople for sponsoring a bill to ban private transfer fees on real estate.

The Home Equity Protection Act of 2010, introduced in Congress Wednesday, would ban the fees at a federal level, following state-level restrictions or bans in Arizona, California, Florida, Texas and several other states.

The fees, which are not very common yet, were invented by Freehold Capital Partners, a financial firm started by Texas land developer Joseph Alderman, who sold all his land assets in the Austin, Texas area to run Freehold full-time in 2004.

The fees work like this: A builder builds a new home and sells it, then every time the house is subsequently sold, 1% of the sale price bounces back to the developer in the form of a fee paid by the seller. Freehold has said that it intends to securitize the income stream from these fees in order to generate investment capital for new home-building efforts.

Opponents have dubbed the fees "Wall Street Home Resale Fees," but the effort has not caught on with Wall Street. One official at a major investment bank who listened to Freehold's pitch told Developments that the plan is too long-term. Investment banks, it seems, don't like to underwrite securities that don't produce any income until years afterwards, and considering that most homeowners live in their homes for about 6.6 years before selling them, that's a slow return.

But Mr. Alderman, in an interview Thursday, said that the returns to investors would be much quicker. He also said that a competing bill, sponsored by U.S. Rep. Phil Gingrey, (Repub., Ga.), would recognize the fees as legal as long as they are accompanied by a disclosure statement.

"If you walk through a residential subdivision even a year after it's built, you'll see lots of ‘for-sale' signs," Mr. Alderman said. "Is it an investment for everyone? No. Is it suited for pension funds and endowments who are looking for a stable, plain vanilla, inflation-indexed investment? Definitely."

Detractors say the fees amount to little more than an equity-stripping scheme that lines the pockets of greedy developers and would benefit Wall Street investors, should a security derived from the fee be created.

"These fees add no benefit or value to a property, and are little more than a predatory scheme meant to take advantage of unsuspecting homeowners," said Kurt Pfotenhauer, chief executive of the American Land Title Association. "Our Coalition thanks Congresswoman Waters and the bill's co-sponsors for recognizing the danger that these fees pose to homeowners and the real estate market."

But Alderman shot back, saying that's rich coming from a group that represents title agents, who take a cut of every title transfer on a home sale in the form of fees and insurance. Instead, he said, the fees are a way of spreading out the costs of development so that they don't fall entirely on he first buyer of the home.

"They're accusing us of stripping home owner equity," Mr. Alderman said. "Not only is nothing further from the truth, but … it's the pot calling the kettle black."

Issues:Housing