Today I’ll explain how FNMA (Fannie Mae) is killing transactions by requiring private road maintenance agreements. Sequim, Washington is rural America away from the hustle and bustle of the metropolis, the crime, the noise, and the pollution. Sequim really is what so many hard working people planning their retirement see as a genuine piece of Americana. Living in Sequim is like going back in time 20 or 30 years when people were always friendly, children were respectful of adults, and private property was . . . still private property owned and controlled by the homeowner.
Enter FNMA, the powerhouse that controls how mortgage companies and banks make loans and to whom they can make them. If you apply for a loan in a rural area like Sequim, beware buyer, because bureaucrats at FNMA may kill your purchase. Of course, this doesn’t just kill the buyer’s transaction. It also kills the sale for the homeowner, and may make a home virtually unsellable. Here is what is happening.
Private Road Maintenance – A True Story
A couple put their home up for sale in Sequim on a private road, which serves six other homes. This private driveway easement is a legal easement on the plat that created this little subdivision. That means this is a legally enforceable easement, and it is forever an easement that “runs with the land.” The easement (or driveway) is gravel, well compacted, and has not needed maintenance for 40 years, apart from an occasional filling of a small pothole with a shovel by one of the homeowners. The homeowners, like tens of thousands of rural homeowners on the Olympic Peninsula (and across America), never formed a formal homeowners’ association, and they have no intention of doing so. The original developer never created a formal road maintenance agreement in writing, and the homeowners who bought the lots got loans to build their homes, and subsequent owners also got loans to finance the purchase of these same homes. No one ever saw the need, nor did they want a road maintenance agreement. Why would they? The road never needed maintenance of any significant measure, and a shovel and twenty minutes once or twice a year filled any potholes. Why create a bureaucracy when none is needed?
The homeowners drove for four decades on this driveway, as they call it, without any need to discuss homeowners’ associations or road maintenance agreements.
An elderly couple in this subdivision decided to sell their manufactured home on one acre. The buyers are in their 70’s, too, and apply for a loan. They qualify for the loan, but their lender tells them days before closing that someone in the bureaucracy, i.e. the FNMA regulators in the sky who rule the underwriters, are threatening not to make the loan unless all seven homeowners agree to a written private road maintenance agreement, have their signatures notarized, and record it. The agreement must state that all private road maintenance expenses will be shared equally among the seven homeowners, or words to that effect.
Someone quotes this FNMA regulation (FNMA: B4-1.4-08):
A loan subject to FNMA (Fannie Mae) regulations requires rural areas like Sequim, Washington to do the impossible: get all homeowners on a private driveway or easement to sign a private road maintenance agreement. Many in the bureaucracy are generally quite ignorant of how this works. The vast majority of these bureaucrats, while good and honest people, have never actually been in the real estate business. One such person suggested that “it can’t be that complicated to get a private road maintenance agreement signed by all the homeowners. Can’t you just find one on the Internet?”
According to FNMA, if a written agreement cannot be obtained, “the lender must indemnify Fannie Mae for any losses or expenses it may incur due to the physical condition of the street or in order to establish and/or access thereto.” Since no lender on the face of the earth is going to agree to such an outlandish indemnification, one has to wonder if these bureaucrats ever had any real world experience in real estate.
For those of us in the field with our boots firmly planted on terra firma, living and breathing real estate, and for Realtors like me who practiced real estate law for 20 years and drafted hundreds of real estate documents, including many private road maintenance agreements (and litigated the language in these agreements), the naivete of these underwriting and FNMA regulators is shocking.
Why Require a Private Road Maintenance Agreement?
I asked one lending bureaucrat what motivation would any of the homeowners on a private road have to sign an agreement that obligates them to do something they have never had to do before? He acted as though he did not understand the question. These regulators will kill a loan before they will answer critically important questions, such as these.
- Who will hire an attorney to draft a legally sufficient private road maintenance agreement? Not the buyer. Not the seller. Not the homeowners.
- Who will pay that attorney’s legal fees?
- Who will track down all the true owners of the properties on the street and schedule appointments to present the private road maintenance agreement?
- Who will calculate the amount each homeowner should theoretically be charged for road maintenance? (It is theoretical because on most of these private driveways, there have never been any expenses or maintenance costs whatsoever.) And the apportionment of road maintenance is not necessarily equal. The homeowners at the beginning of a long driveway will argue that they should not have to pay for the costs to maintain the road for a quarter mile when they only use one hundred feet.
- Who will meet with the homeowners and explain the purpose of the agreement, the interpretation of the language in every paragraph, and who will explain the legal significance of signing the agreement?
- Homeowners are likely to ask, “How is it all of us on this street got loans when we bought our homes, and we did not have to have a private road maintenance agreement then?”
- The biggest question that seems to escape the regulators is this one, “What motivation do homeowners have to voluntarily sign a private road maintenance agreement when they have never had the need for one?”
The bottom line is that there is virtually no possibility 20 or 10 or even seven homeowners will all agree to sign a private road maintenance agreement simply because one homeowner wants to sell their home to a buyer whose lender is subject to Fannie Mae regulation FNMA: B4-1.4-08.
The final result is that many homeowners will be unable to sell their homes, especially manufactured homes, subject to this profoundly unfair regulation. This regulation will hurt many elderly couples who must sell their manufactured homes on a private driveway due to health reasons or the death of a spouse. This regulation has never been enforced in the Sequim area, but now many elderly homeowners will find out that their homes are unsellable, since cash buyers are extremely rare for manufactured homes.
The regulators don’t understand real estate, and they certainly do not understand the implications of requiring private road maintenance agreements, or they would never have written such a profoundly ridiculous rule. Since a recorded easement, like the one in this story, is legally part of the real estate, a recorded deed of trust secures the loan with or without a road maintenance agreement. The potential problems they imagine for lenders is roughly one million times less than the problem they have created for buyers and sellers. Of course, the regulators never consulted with me or other Realtors in the business in rural areas, but there would have been an easy answer if they really felt themselves compelled by an overpowering desire to create such a regulation. They could have added an exception that allowed a lender to include a statement explaining why such an agreement would be inappropriate for the local real estate market and why it would create an undue burden on all parties involved. But they did not. Private road maintenance agreements should never be forced on private property owners by regulatory fiat.
UPDATE: I include this important update because some of you may face this nightmare, and after a great deal of legal research, telephone calls, emails, and administrative resources coming to bear on this issue, we found the solution in the state of Washington. Under the FNMA regs, if there is a state statute that does the same thing that a private road maintenance agreement would do, i.e. stating what is already true under the common law that everyone using the road is responsible for its care, then the FNMA requirement is met and the loan can be made in compliance with FNMA. Here is the specific language in the Washington law (HB 1349) that does this:
Summary of House Bill 1349 Provision:
An easement is a non-possessory interest in the land of another that entitles parties to a private right-of-way, embodying the right to pass across another’s land.
The cost of maintaining an easement is shared by the land owner and the persons with the legal right to use the easement. The parties can determine the terms of the maintenance in an agreement recorded with the county auditor. In the alternative, if the parties do not have an agreement regarding maintenance, the cost of maintaining the easement must be shared by the parties in proportion to their use of the easement. Each party is required to repair any damage that they cause due to negligence or abnormal use. In resolving conflicts between the parties, the frequency of each party’s use of the easement and the size and weight of their vehicles should be considered unless the agreement determines otherwise.
A civil cause of action for money damages, specific performance, or contribution may be brought if a party fails to maintain the easement according to an agreement or fails to pay their portion of the cost for maintenance in the absence of an agreement. The court may order the parties to submit to arbitration. The court (or arbitrator) may order any equitable relief that may be just under the circumstances, and must award the prevailing party all court costs, arbitration fees, and reasonable attorneys’ fees.
The act applies to all easements existing on or created after January 1, 2012. The act does not apply to any easement held by any public entity, railroad company or affiliate, and entity regulated under the forest practices law.
Update February 25, 2015: For reasons unknown, the above bill was passed in the house and the senate, but never passed in final form to become part of the RCW (Revised Code of Washington), and those bills languished since 2012 until now in 2015 when H-1237.1 has revived the old bills for creating a new law for private road maintenance. Finally, it appears that it will become law and save hundreds of thousands of homeowners from the dictates of FNMA that could kill the sale of their home (and the financing for the buyers). The final bill has not been passed as of today, but you should be able to track its progress and see the final bill as passed at this link: Washington Private Road Maintenance Agreements. The new law will be placed under Title 64 of the RCW, so that’s where you’ll be able to find it when it is finalized.
Update March 23, 2015: Sad news folks. The above bill has died. The politicians in Olympia probably have no idea of the importance of it, and they didn’t take any time to vote on it. No one cares. Oh boy. Wait until you try to sell your home on a private road and your buyer cannot get the FHA loan. Hundreds of homeowners will be affected by this, and imagine the devastation if you simply cannot sell your home to anyone getting a loan that requires FNMA involvement. By not passing this simple bill, many will not be able to sell their homes, except to cash buyers or those getting a conventional loan.
Update August 6, 2017: For a current update on the status of this legislation in the State of Washington, which is taking forever to get done, go to this special update page (which is really cool) showing the complete status of this bill in the house and senate: Chuck Marunde’s Update on the Private Road Maintenance Agreement problem.
Possibly Related Posts:
- Homeowner Associations: Nightmare of Nightmares
- Appraisal Management Companies
- How Do Reverse Mortgages Work?
- The Loan Process
- VA Loan Involves Massive Paperwork