WASHINGTON (Dow Jones)--As U.S. lawmakers move to prevent another binge in risky mortgage lending, a new real estate money-making concept is grabbing the attention of federal regulators.

New York-based Freehold Capital Partners wants developers across the country to attach transfer fee covenants to properties allowing the builder and Freehold to reap profits for decades after a property is sold. The covenants typically require future home sellers to pay 1% of the sales price to the home builder or other third parties each time the house is resold for 99 years.

The obligation is usually inserted into the common rules for a subdivision--alongside such banal mandates as those requiring owners to keep their dogs leashed and their grass trimmed. Like those restrictions, the fee runs with the land and can't be waived by buyers or sellers: if it isn't paid, the sale can't go through.

The fees have sparked an uproar from title insurers and realtors, who have pushed to ban them in several states. They claim the fees rob equity from homeowners and make it more difficult to sell houses. Title insurers have another concern: If they fail to discover the transfer fee covenant during the title search, they are liable for the fees.

"This is a case where people are doing something because it's not illegal. We don't think it's fair, we don't think it's wise," said Kurt Pfotenhauer, chief executive of American Land Title Association, a national trade association.

Freehold claims that more than 6,000 developers including "some of the largest, most well respected developers" in the U.S., have signed up. It now says it's on the verge of securitizing the rights to the transfer fees streaming from this large pool of real estate.

The company hired the high-profile law firm Venable LLP in December 2009 to lobby for federal stimulus dollars to finance the securitization. U.S. Senate lobbying records indicate that Venable lobbied on behalf of Freehold on pending jobs legislation.

Freehold Chief Operating Officer Will White said the company has now abandoned that effort but is close to striking a deal with a Wall Street bank to do the securitization. Freehold won't name the interested banks.

Freehold has gotten "a receptive audience at a number of institutions," White said in comments emailed to Dow Jones Newswires through a publicist. He added, "The size of the portfolio is tremendous, covering hundreds of billions [of dollars] in real estate projects nationwide."

Pfotenhauer worries that securitization will open "a gusher of demand" from builders because they will receive an upfront windfall for selling the stream of fees to investors.

    Resistance in Washington  

Transfer fees aren't addressed in the sprawling financial regulatory bill that is pending in Congress, but the Freehold plan is running into resistance in Washington. Rep. Brad Sherman (D., Calif.) called it a "new predatory financial scheme" at a congressional hearing last month.

Federal Housing Finance Agency Acting Director Ed DeMarco hinted at the hearing that his agency might bar Fannie Mae (FNM) and Freddie Mac (FRE) from buying mortgages on homes with transfer fees attached. A Federal Housing Administration official separately assured the title insurer group earlier this year that the government won't insure mortgages backed by homes with the transfer fee covenant.

DeMarco said he was "very troubled" by what he was learning about transfer fees: "I would expect that the enterprises and FHFA would have something to say about this is in the near future."

By banning the fees for Fannie and Freddie mortgages, federal regulators could deal a blow to Freehold's strategy. Together, the mortgage companies and the FHA backed 96.5% of all U.S. home mortgages during the first quarter.

    Freehold: Spreads Development Costs "More Fairly"  

Freehold was founded by Texas developer Joseph B. Alderman in the 1990s and the company began peddling its securitization plan to Wall Street banks a few years ago, even as the securitization markets had entered a deep freeze.

A marketing brochure for a predecessor company Freehold Licensing likens real estate development to artistic endeavors such as writing a book or recording a song. Builders, like authors and musicians, shouldn't accept a one-time payment, the brochure argues.

Freehold says its method allows builders to "more fairly" spread the costs of developing a parcel of land among successive owners. The company claims the fees enable the builder to lower the sales price on the home.

Critics counter there is nothing to ensure buyers will pay less for a home with a transfer fee covenant attached and, when it comes time to sell, owners will pay the fees even if they sell at a loss. They also point out the fees go to third parties that haven't footed the bill for improvements the homeowner has made.

"There's no service being performed there. There's nothing going on there," National Association of Realtors spokesman Lucien Salvant said.

Freehold won't disclose the names of the developers that have signed on to its system. But Texas Association of Builders lobbyist Paul Cauduro said large, publicly-traded home builders have shunned the concept in Texas for fear of attracting bad press. The appeal is much stronger for smaller builders who are "trying to find any way they can to get attractive financing," he said.

Small home builders began calling National Association of Home Builders Senior Vice President David Ledford last fall to ask about Freehold and whether the U.S. Treasury was close to approving the use of federal stimulus dollars to securitize transfer fees.

"They were telling our guys that the paper was on [Treasury Secretary Tim] Geithner's desk and was waiting to be signed," Ledford said. Ledford said he told the NAHB members that "it didn't seem that a securitization program could be started up anytime soon."