Tell New York What You Really Think. Really – Regulatory,Legislative and Tax Issues – Life and Health Insurance News
Posted using ShareThis
|
||||||
|
Law.com has an important article for anyone using an outside attorney that handles closing funds. The New Jersey Supreme Court is deciding if a title insurer can be held liable for a lawyer’s theft of a home buyer’s funds if it fails to tell the buyer directly it is not responsible for the lawyer’s misdeeds. The case, [...] Is it the End of the World as We Know It? New York is considering a state run “Title Guarantee Department” that would appoint directors who in turn would appoint and hire “officers and agents as it may require,” according to PRNewswire.com In response, a new lobbying group has taken the initiative to attempt to stop [...] Companies that deal with sensitive information, such as Title Insurance Companies have need to take particular attention to the new social media, especially with the use of confidential information being sent via I-Phones and Blackberries. According to Darity Wesley of Privacy Gurus, here are some guidelines in that regard. The skill that is absolutely essential to [...] For more than two years, I have been blogging about private transfer fee covenants and the group that is promoting them, Freehold Licensing. Freehold has actually attempted to patent their business strategy of creating private transfer fee covenants (a separate act that I find offensive). The group now has a new name and a new strategy, all evolving while several states and trade organizations are trying to put a stop to private transfer fee covenants. To summarize, a private transfer fee covenant is a covenant that purports to run with the land and bind subsequent owners of property to pay a 1% fee to the original covenantor. Freehold, of course, gets to share in the fee for their assistance in setting up the covenant. To briefly recap my previous blogs, In Patently Stupid, I explained the covenant and my opinion of their attempt to patent the practice as a "business strategy." In Freehold Licensing Defends Covenants, I addressed comments posted by a representative of Freehold and the Texas legislation aimed at banning private transfer fee covenants. And in a third blog, To Touch and Concern, I hypothesized that such covenants are unenforceable under common law. After I suggested in my blog that states should pass legislation, as they had in Texas, to ban private transfer fee covenants, four states did just that – Florida, Missouri, Kansas and Oregon. I followed up with a blog about Ohio’s pending legislation, Banning Transfer Fee Covenants in Ohio. After the blog about Ohio’s legislation, I started to get calls from people across the country with an interest in these covenants. I was contacted by an attorney in South Carolina who was referred to me by a national underwriter that issued a bulletin stating that they would no longer insure property subject to a private transfer fee covenant. He was representing an organization of homeowners’ associations concerned about transfer fee covenants commonly used to fund their members’ associations. I responded with a blog about the importance of legitimate uses of transfer fee covenants to fund homeowners associations and not-for-profit groups that actually provide a benefit to the property and their communities, Underwriters Refuse to Insure Transfer Fee Covenants. I was later contacted by the American Land Title Association (ALTA) which is working with the National Association of Realtors (NAR) on model legislation to assist states with banning the Freehold-type covenants. (See The American Land Title Association Opposes Private Transfer Fee Covenants). Just last week, I was interviewed by a journalist with the Washington Post who is working on an article for consumers about private transfer fee covenants. With all the activity centered around prohibiting private transfer fee covenants, I thought I’d see what Freehold was up to these days. I was surprised to find out that they are still quite active and even more aggressive in their marketing of private transfer fee covenants. Freehold Licensing issued a press release a couple of weeks ago to announce the move of its corporate offices from Austin, Texas to Midtown Manhattan.
It has also apparently changed its name to Freehold Capital Partners. Maybe because of the extensive bad press associated with "Freehold Licensing." If you Google Freehold Licensing, the search results include such listings as "Closing the Door on Freehold Licensing" and "Is this a scam…" In fact, when you enter the search term "Freehold Licensing" in Google, they suggest the search term "Freehold Licensing Scam." But, the name isn’t all that has changed. What Freehold used to refer to as "Transfer Fee Instruments" on its old Web site is now called "Reconveyance Fee Instruments" on its new Web site. Again, could this possibly be because of the negative press associated with the former? If this isn’t enough to make you cringe, Freehold is now touting the benefits of pooling and securitizing the covenants into securities that can be sold to provide a lump sum payment to the covenantor, usually a developer, of the present value of the covenants. We are now familiar with Mortgage Backed Securities (MBS) that contributed to the financial crisis. It was once thought that there was no risk associated with MBS. Freehold makes the bold statement that "Reconveyance Fee Instruments represent a fully-collateralized financial instrument with no meaningful risk of default… Investors acquiring shares of the pool would own a long-term income-producing asset secured by a real property interest, and which carried no meaningful risk of default." Of course, it states in the small print that "this is not an offer to sell, buy, market, offer, broker or securitize Reconveyance Fee Instruments. There is no assurance that any particular Instrument will be suitable for sale or securitization or that public market for Reconveyance Fee Instruments will develop, mature or persist." Even so, I think the Securities and Exchange Commission should keep a close eye on Freehold’s marketing material. And what of their claim that there is "no meaningful risk of default" on such instruments? Could that be true? I don’t think so. In fact, in my opinion there is a very real and substantial risk of default. A handful of states have already banned private transfer fee covenants. Though they only apply to attempts to create such covenants after the passage of the legislation, there seems to be a general sense that private transfer fee covenants violate public policy and there is a concern that they may be held unenforceable under common law. Should that happen, investors would likely stand to lose their entire investment. Freehold realizes the controversy surrounding private transfer fee covenants and has provided a page in its brochure dedicated to "Reconveyance Fees Rights & The Law: A Primer for Lawyers."
Freehold also provides several "representative cases" and claims that "the Freehold system is based upon sound legal principals." Poppy-cock! Freehold cites cases and picks precise quotes that appear to support its position. However, the cases are not "representative" of the Freehold system. All of the cases clearly involve covenants that "touch and concern" the land in some way. Some involve restrictive covenants prohibiting certain types of buildings (e.g. multi-family), fences or tree lines. Others deal with affirmative covenants requiring the payments of fees for recreational purposes (e.g. to support a recreational facility), upkeep of dams, roads and other improvements, or homeowner’s association dues. All of these clearly touch and concern the land and benefit the property owners in some fashion. By contrast, the Freehold covenant does not provide any benefit to the property owners or their community. It is, as Freehold says, "a mere obligation to pay money." The only party that benefits from the fee is the original covenantor/developer, who is likely to be out of the picture before the payments are due. The funds collected do not go toward supporting common areas, recreational facilities, or homeowner’s associations; it merely creates "a long-term income stream" for the covenantor or investors. The Supreme Court of Florida explained this distinction in Palm Beach County v. Cove Club Invs., 734 So. 2d 379 (Fla. 1999).
See also, Regency Homes Ass’n v. Egermayer, 243 Neb. 286, 295 (Neb. 1993).
And, to put it even more simply, see Beeter v. Sawyer Disposal LLC, 2009 ND 153, P9 (N.D. 2009).
Of course, none of these case, including those cited by Freehold, are exactly on-point. I have not been able to find a published case that has addressed the type of covenant being promoted by Freehold. That will not likely happen for some time. It will take a property encumbered by a Freehold covenant transferred to a subsequent purchaser who desires to challenge it in court. These covenants are still fairly new and there haven’t likely been many re-sold yet. It will be interesting to see what legislation develops and the effect that has on transfer fee covenants. With the new efforts of ALTA and NAR to raise awareness among state legislators, it is likely that the bans will spread to more states soon. Of course, most of the laws on this issue, including those proposed by ALTA and NAR, contain exceptions for non-profit organizations. Freehold contends that this "runs afoul of the constitution." We could see some litigation in the near future, but I suspect that such laws would be upheld. Whether Freehold calls them "transfer fee instruments" or "reconveyance fee instruments," they just don’t pass the smell-test. Clearly, many organizations and state legislatures do not favor them. One state senator called them "sophisticated pyramid schemes which steal equity from the owner." Public sentiment is against Freehold on this one. Imagine what would happen if everyone were to sell their property with such a covenant? If this type of covenant were allowed, theoretically, any seller who is not satisfied with the sales price he is able to get could just include a covenant in the deed to the buyer that required him to be paid 1% every time the property sells for the next 99 years. And, what would happen when the property had been sold two or three times with each subsequent owner reserving such payment rights by covenant? That would create a terrible mess and would, of course, be absurd. But, what would prevent it from happening (other than common sense)? But, I digress. Freehold has continued to get my dander up… first by coming up with this ridiculous concept, then by attempting to patent it, and now… trying to securitize the covenants in to an investment. Where will it all end? Robert A. Franco Ohio independent title agents and abstractors should give serious consideration to attending the Ohio Association of Independent Title Agents’ (OAITA) convention on April 19, 2010. There is finally an association dedicated to addressing the unique concerns of the independent agents and it is worthy of your support. I’ll be there this year and I hope to see a strong turn out from Ohioans! Why is the OAITA so important? Well, I certainly do not speak for the association, but from my perspective many of the changes our industry has seen over the past decade have created an environment that threatens the existence of small, independent title agents. Traditional land title associations are made up of broader members, which includes underwriters and large agents with many affiliated business arrangements. This is not to say that the Ohio Land Title Association is bad - quite to the contrary, they do a fine job in most respects. However, when it comes to issues like AfBAs, they have a conflict of interest; some of their largest members support AfBAs. There are other issues, too; such as the requirement for closing protection coverage and the annual CPA audit. And… in the words of the OAITA:
Personally, I think it’s great that independent agents have an association that will represent their concerns. Here are the details for the convention:
As you can see, I’ll be there and they have asked me to participate as a panelist on the Independent Title Closer & Abstractor Panel. If you make it, hopefully you will get to hear my opinion on the issues facing the independent abstractors and why those issues are important for the industry. Much like issues that are unique to independent title agents, independent abstractors also have interests which diverge from those of the underwriters and large agents with AfBAs. I don’t know exactly what the panel will be asked to discuss, but there are several issues that I think deserve attention.
I’m excited to hear what issues will be discussed at the convention. Anytime agents gather, they ultimately end up discussing problems they face – usually on breaks in the back of the room. Finally, there is a conference devoted to those issues and providing an opportunity for agents and abstractors to vent their concerns to an organization that is actually interested in what they have to say. I hope to see many of you there! Robert A. Franco |
||||||
|
Copyright © 2010 Landrecs.com – Land Title Consulting & Education - All Rights Reserved |
||||||