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President Trump’s Two Residential Mortgages

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Dan Abrams

I was interviewed in Trump’s Mortgage Fraud Hypocrisy on The Dan Abrams Show (SiriusXM POTUS 124) (behind paywall). A recording is available on YouTube (no paywall). The auto-generated (cleaned up a bit) transcript of the relevant part reads,

Dan Abrams: This effort to get rid of Lisa Cook as one of the governors at the Fed has heated up. Remember, the Supreme Court basically said Trump couldn’t do it without due process, and it seems now he’s beginning the process of quote-unquote doing the due process, telling her that they want to get rid of her. It made me remember an article that came out in December, which I think is very important in this context — it’s from ProPublica, and the headline is “Trump’s Own Mortgages Match His Description of Mortgage Fraud, Records Reveal.” It talks about how in 1993, Trump signed a mortgage for a home in Palm Beach, pledging it would be his principal residence. Seven weeks later, he got another mortgage for a seven-bedroom, marble-floored neighboring property, saying it too would be his principal residence. And in reality, ProPublica reports, Trump — then a New Yorker — does not appear to have lived in either home, let alone used them as a principal residence. That seems to me precisely the issue the administration is focusing on with regard to Lisa Cook. And if you’re interested in the article, it’s got all the documents Trump signed, with images of them.

Remember, in October federal prosecutors charged Letitia James, and a central claim in that case was that she purchased a house in Virginia pledging to her lender that it would serve as her second home, and then used it as an investment property and rented it out. [The source transcript is garbled here — something to the effect that Trump’s mortgage agreements were arguably a more significant misrepresentation, since his said the properties would be his primary residence, not merely a second home as in the James case; recommend checking the audio for the exact wording before publishing.] But Trump, when he was declaring that he was going to fire Lisa Cook, specifically noted that she had signed two primary-residence mortgages within weeks of each other — exactly as the records show he did in Florida. Here’s the quote they sent her: “You signed one document attesting that a property in Michigan would be your primary residence for the next year. Two weeks later, you signed another document for a property in Georgia stating it would be your primary residence for the next year. It is inconceivable that you were not aware of your first commitment when making the second. At a minimum, the conduct at issue exhibits the sort of gross negligence in financial transactions that calls into question your competence and trustworthiness.” The Trump administration has made similar claims regarding Adam Schiff and Eric Swalwell as well.

So when Trump administration officials are confronted about this, they do the usual, which is talk about it from a law enforcement perspective, talk about how important this is. This is Bill Pulte — remember, this guy’s the worst person in this administration, as far as I’m concerned, the most politicized. He’s the one who was acting director of National Intelligence; he couldn’t get confirmed, I don’t think, for any position, and yet they keep bouncing him around — but he’s been overseeing housing, and that’s given him access to all these mortgage records. So here is Bill Pulte, speaking in June:

“This is not political from my perspective. I’m in charge of making sure that we have a mortgage market that is safe and sound. It doesn’t matter whether you’re Republican or Democrat or a Fed governor — if you commit mortgage fraud, we’re going to refer it. And that’s what we did in the Lisa Cook case. I do believe that eventually she’ll be indicted. And let’s say the Supreme Court rules against the people who are saying there’s cause, or there’s ability, to fire her — I do expect her to eventually be indicted. That’s just my own opinion; I’d refer you to the DOJ for specifics. But if she is indicted, obviously that would give the ability to fire her for cause, even more so than we believe — I’ll just speak for myself — already exists.”

Let me bring in David Reiss. He’s a clinical professor of law at Cornell Tech and Cornell Law School, an expert in the real estate sector. Professor, thanks very much for coming on — appreciate it.

David Reiss: My pleasure.

ABRAMS: From a legal perspective, these are the kinds of cases that are almost never prosecuted — is that right?

REISS: That’s correct. There was a lot of this kind of behavior before the Great Financial Crisis in the early 2000s, but it was very rarely prosecuted.

ABRAMS: So is there a difference between what ProPublica seems to have been able to show that Donald Trump did and what Lisa Cook is accused of?

REISS: I don’t think so. I think it’s the same, or in some ways an even worse set of facts. There’s the statement by the broker who said these were going to be rentals from the beginning. This is exactly the kind of behavior that Pulte says is unacceptable — the kind he’s identified with opponents of the Trump administration.

ABRAMS: So could she use that — meaning, let’s assume for a moment that she is indicted — is that really just something for the court of public opinion, or is that something she could potentially introduce as a defense?

REISS: That’s an interesting question. On a straight legal answer, I’d say selective enforcement — arguing that I’m being prosecuted but somebody else isn’t — is a very high standard to meet, especially for a political case like we’re seeing with Cook and some of the others. But I do think judges have been choosing not to give a [presumption of regularity] to the Trump DOJ, so judges may use their discretion to look at this with some sense that it’s just a political hit job.

ABRAMS: Right — because the Trump allegations, the Trump information, is outside the statute of limitations. So there’s no way that could be prosecuted. Correct?

REISS: That is correct. Even if it violated the law, it’s past the statute of limitations. There’s no way to bring it back.

ABRAMS: Right. Now, in response to questions, a White House spokesperson told ProPublica: “President Trump’s two mortgages you’re referencing are from the same lender. There was no defraud[ing]. It is illogical to believe that the same lender would agree to defraud itself.” [As transcribed — worth checking this quote against the ProPublica article’s exact wording before publishing.] What do you make of that?

REISS: Well, it’s interesting, because that’s not the standard that applies. It’s a federal standard — a section of federal law, 1014. It’s really about whether, at the time you signed it, you knew it was false. It’s not a fraud standard — it doesn’t have all the elements of fraud, such as materiality. So that’s a bit of a misdirection, suggesting that the lender knew about this or went along with it. That’s not the standard for the criminal law here.

ABRAMS: Putting aside the criminal law for a minute — does what they’re saying make sense? I’m trying to figure out what their point even is. “President Trump’s two mortgages you’re referencing are from the same lender … it’s illogical to believe that the same lender would agree to defraud itself.” It seems to be suggesting the lender wouldn’t have done it a second time — but if there was fraud in the first case, maybe they just didn’t realize it. I don’t know — this isn’t my area of expertise, but as I think about it, maybe they didn’t realize, when they made the first mortgage, that the information was false, and so they just used the same information for the second one.

REISS: Interpreting the statement from the administration in the best possible light, they’re saying perhaps he intended the first property as his primary residence, and that was true at the time — and the lender knew about the first one and knew about the second one. If you think about the statute requiring knowledge of falsehood at the time of signing, you can construct a story where that’s the case. That would be the argument they’d make at trial, if this weren’t past the statute of limitations and if Pulte had referred it to DOJ and DOJ chose to pursue it.

ABRAMS: It is amazing to me — and again, I don’t know if you’re going to want to answer this, you don’t have to — but it feels like the double standard the president often applies to others versus himself is astonishing. This is such an apples-to-apples comparison. We often say, well, it’s not really apples to apples — but this really is apples to apples, isn’t it?

REISS: It is. I’m going to say a few things in response to that. One: this is genuine hypocrisy, but unless it enrages his base — unless they say, “yes, our leader is applying two standards, and that’s unfair, and we want to punish him for that and not vote for him or for his slate” — it doesn’t really matter. Second — and this doesn’t excuse his behavior in the slightest, or Pulte’s behavior in the slightest — hypocrisy is a real bipartisan issue. You have Spitzer prosecuting johns, you have Hastert and Gingrich bringing the impeachment against President Clinton. There’s a lot of hypocrisy by politicians, and this, I think, is just part of something massive—

ABRAMS: I guess what makes this different to me is that with these cases, you can make the argument that none of them should be brought, or you can make the argument that they’re really important to be brought. I don’t think Eliot Spitzer — who suffered, who lost his job, there were real consequences for him — was out there in public saying, “these johns, they’re a real problem.” And that’s what Trump is doing. He’s going out there criticizing Lisa Cook as if she’s a criminal. I think that’s what makes this different.

REISS: I agree. It’s more extreme, but it’s really part and parcel of his approach to politics, which is attack, attack, attack, and deny, deny, deny, if anything comes close to touching your behavior or your team’s behavior. And it’s not just Trump — there are members of the administration who have similar mortgage issues, and allegedly Letitia James, Cook, and Schiff have that issue too. It’s part and parcel of behavior on the left and on the right, but he’s only going after Democrats. And that’s obviously true.

ABRAMS: Yep — and again, [the source transcript is garbled here: “only going after Democrats is sort of part and parcel of this administration going after Democrats for doing exactly what he did to me, is a step further” — recommend checking against the audio for the exact wording before publishing]. David Reiss, thank you so much for coming on the program. Really appreciate it.

Bullying the Fed

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Fed Chair Jerome Powell

Central Banking quoted me in Economists Denounce Trump’s ‘Bullying’ of Fed Chair (sign up required). It opens,

Economists have attacked what they regard as US president Donald Trump’s bullying of Federal Reserve chair Jerome Powell, describing it as dangerous for the central bank’s continued independence.

On June 30, Trump posted on his social media platform a copy of a handwritten letter to Powell showing interest rates around the world. In the letter, Trump had written: “Jerome, you are as usual, too late. You have cost the USA a fortune, and continue to do so. You should lower the rate by a lot. Hundreds of billions of dollars being lost. No inflation.”

Along with the note, Trump posted that “Jerome ‘Too Late’ Powell, and his entire Board, should be ashamed of themselves for allowing this to happen to the United States. They have one of the easiest, yet most prestigious, jobs in America, and they have FAILED — And continue to do so”.

He added: “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost. The Board just sits there and watches, so they are equally to blame. We should be paying 1% Interest, or better!”

On July 1, Powell said the Fed would probably have lowered rates already had it not been for the tariffs and trade policies introduced by the Trump administration.

Ralf Fendel, professor of economics at WHU – Otto Beisheim School of Management in Germany, says Trump’s note bears all the hallmarks of political interference.

“Handwritten personal correspondence is traditionally reserved for heartfelt gratitude or strategic diplomacy, but not for exerting pressure on an independent central bank,” he tells Central Banking. “In resisting such pressure, Mr Powell is upholding the Fed’s institutional credibility and responding appropriately to a macroeconomic environment clouded by trade policy uncertainty and various economic risks.”

Fendel adds that Fed decisions must be guided by economic data and not the demands of the White House.

William English – professor of economics at Yale University, and a former director of the Fed’s monetary affairs division and secretary to the Federal Open Market Committee (FOMC) – says that having a president who is so publicly critical makes the Fed’s job more complicated. “But they have their mandate and will do their best to achieve that,” he says. “We’ll see how it goes!”

Francesco Bianchi, professor of economics and department chair at Johns Hopkins University, says the most recent remarks by Trump represent a turn for the worse.

“Such a confrontational stance cannot be good for central bank independence,” he says. “Powell probably feels that he needs to push back against the pressure and that he has a bit more freedom given that his second term is coming to an end.”

Fed historian Robert Hetzel adds that Trump appears to want to return to a time when the central bank was subservient to the US Treasury.

David Reiss, professor of law at Cornell University, says there is an extensive history of presidents “jawboning” the Fed chair to lower rates. However, he says central banks work better when “insulated from the political exigencies of political leaders”.

“Paradoxically, bullying the central bank can lead to interest rates increasing, as markets demand a higher risk premium as trust in the central bank’s decision-making decreases,” he says. He also concurs with Powell’s assessment that tariffs are inflationary through many channels.

Fannie, Freddie and Trump

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Profile picture for William J. Pulte

FHFA Director Bill Pulte

Central Banking quoted me in Fannie, Freddie . . . and Donald. It reads, in part,

IIn a client note on May 13, investment management firm Pimco said any privatisation of Fannie and Freddie would be a solution in search of a problem.

“If the GSEs are released but the government remains accountable to come to their rescue, wouldn’t taxpayers ultimately be the biggest loser, once again, by seeing GSE gains privatised but losses socialised?” it said, adding: “Don’t fix what’s not broken.”

David Reiss, professor at Cornell Law School, says Pimco’s view reflects the fact that the mortgage market has been functioning “pretty smoothly” since Fannie and Freddie were nationalised. According to this viewpoint, there is “no need to release them from conservatorship”.

However, Reiss says he does not like to see so much power and influence concentrated in the GSEs, and he believes the private sector would do a better job of evaluating credit risk.

“Some people – mostly investors in Fannie and Freddie securities – think [privatisation] is the right thing to do because the conservatorships were supposed to be temporary and the companies should be returned to private control and investors should be able to get some kind of return on their investments,” he says.

Reiss adds that some members of the Trump administration think privatisation would generate hundreds of billions of dollars in revenue that could be used to help pay down the national debt, offset tax cuts and seed a sovereign wealth fund.

Joe Tracy, senior fellow with think-tank the American Enterprise Institute and a former official with the Federal Reserve banks of New York and Dallas, agrees with Reiss. “The problem is that they are in conservatorship limbo, so the government has effectively nationalised a large segment of mortgage finance,” he says. “This should be carried out by the private sector.”

    *     *     *

Lawrence White, professor at New York University and co-author of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, says the GSEs are unlikely to become boring unless they are broken down. He believes that if Fannie and Freddie are privatised in their current form, each enterprise will be likely to pose a systemic risk from a financial stability perspective.

“The implication is that their regulator, the Federal Housing Finance Agency [FHFAI, will need to have strong powers of examination and supervision and will need to impose substantial, risk-adjusted capital requirements,” he says.

“It is unclear whether there will be implications for the Fed as lender of last resort, since the Fed’s lending function is currently limited to banks.”

Reiss agrees that the two lenders are systemically important. If they “had to significantly scale back their lending, it would likely cause a crisis in the financial markets”, he says. “If that crisis were not quickly addressed it would cause a crisis in the real economy as well, freezing up credit for new construction and resales.”

Given that the two GSEs issue more than 70% of the outstanding $9 trillion of mortgage-backed securities in the US and, if privatised, would be two of the country’s largest publicly traded companies, the financial stability risks are clear, he says.

Reiss adds that if the privatisations were poorly planned, and if this were priced in by the markets, it would lead to “higher mortgage rates, with all of the knock-on effects that would have”. This, he says, would “increase the magnitude of a financial crisis if the two companies were to report poor financial results down the line”

Reiss’s interpretation of the Fed’s role is different to that of White, and he believes history may end up repeating itself. He says that although the FHFA is Fannie and Freddie’s primary regulator, the Housing and Economic Recovery Act of 2008 requires the Fed to be consulted about any federal government processes related to the companies.

“The Fed may also co-ordinate with other parts of the federal government in responding to a financial crisis, such as purchasing Fannie and Freddie securities, as they did during the financial crisis of 2007-08,” he says. “One could well imagine the Fed playing a similar role in future crises involving Fannie and Freddie.

Improving Minority and Low-Income Homeownership Experiences

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By ajay_suresh - Federal Reserve Bank of Chicago, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=110893107

The Federal Reserve Bank of Chicago

I participated in a very interesting event at the Chicago Fed last week: Risk and Racial bias: Workshop improving Minority and Low-Income Homeownership Experiences. The Community Development and Policy Studies (CDPS) team at the Chicago Fed sponsored the workshop. CDPS is specifically focused on the risks of homeownership, bias in housing and financial markets, how risk and bias interact to affect homeownership experiences for minority or low-income families, and how risks are shared among market participants.

The workshop featured papers from “researchers in the social sciences and law using a range of methodological approaches on questions related to homeownership as a means of wealth accumulation and the experiences of minority and low-income families.”

I was a discussant for an interesting paper, Strategically Staying Small: Regulatory Avoidance and the CRA by Jacelly Cespedes et al. (she presented the paper). The abstract reads

Using the introduction of an asset based two-tiered evaluation scheme in the 1995 CRA reform, we examine the consequences of regulatory avoidance. Banks exploit the attribute-based regulation by strategically slowing asset growth, bunching below the $250M threshold. The regulatory avoidance also produces real effects. Banks near the threshold experience an increase in the rejection rate of LMI loans, while areas they serve experience a decline in county-level small establishment shares and independent innovation. These results highlight a bank’s willingness to take costly actions to avoid regulatory oversight and subsequent credit reduction for individuals whom the CRA is designed to benefit.

The most recent version of the paper does not seem to be publicly available, but an earlier draft can be found here.

 

Rethinking The Federal Home Loan Bank System

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photo by Tony Webster

Law360 published my column, Time To Rethink The Federal Home Loan Bank System. It opens,

The Federal Housing Finance Agency is commencing a comprehensive review of an esoteric but important part of our financial infrastructure this month. The review is called “Federal Home Loan Bank System at 100: Focusing on the Future.”

It is a bit of misnomer, as the system is only 90 years old. Congress brought it into existence in 1932 as one of the first major legislative responses to the Great Depression. But the name of the review also signals that the next 10 years should be a period of reflection regarding the proper role of the system in our broader financial infrastructure.

Just as the name of the review process is a bit misleading, so is the name of the Federal Home Loan Bank system itself. While it was originally designed to support homeownership, it has morphed into a provider of liquidity for large financial institutions.

Banks like JPMorgan Chase & Co., Bank of America Corp., Citibank NA and Wells Fargo & Co. are among its biggest beneficiaries and homeownership is only incidentally supported by their involvement with it.

As part of the comprehensive review of the system, we should give thought to at least changing the name of the system so that it cannot trade on its history as a supporter of affordable homeownership. But we should go even farther and give some thought to spinning off its functions into other parts of the federal financial infrastructure as its functions are redundant with theirs. 

Cutting Back on Community Reinvestment

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Bloomberg Law quoted me in Banks Look to Narrow Exams Under Community Reinvestment Act. It opens,

Banks see an opening to limit the types of violations that could lead to a Community Reinvestment Act downgrade as federal regulators begin rewriting rules under the 1977 law.

Banks say regulators have improperly used consumer fair lending and other violations involving credit cards or other financial products to evaluate compliance with the law meant to increase lending and investment to lower-income communities.

“When a bank violates a consumer protection law, there is no shortage of enforcement agencies and legal regimes available to seek redress and punishment. Adding the CRA to that long list thus has little marginal benefit, and risks diluting and undermining the CRA’s core purpose of promoting community reinvestment,” the Bank Policy Institute, a leading bank lobbying group, said in a Nov. 19 comment letter to the Office of the Comptroller of the Currency.

The OCC set the stage for a CRA rewrite in August by releasing an advanced notice of proposed rulemaking. The Federal Reserve and Federal Deposit Insurance Corp. have signaled a desire to sign on to a joint proposal.

With that momentum building, banks are taking their shot to limit the types of enforcement actions included in CRA reviews. They want CRA reviews to focus on mortgages, small business and other community development investments.

The question of how non-CRA-related violations apply to banks’ community lending reviews is not merely a theoretical exercise.

Wells Fargo & Co. saw its CRA grade downgraded two levels to “needs to improve”in March 2017 following the revelation of the fake accounts it generated for consumers. Several states and municipalities cut off business with the bank in response.

CRA exam cycles run three years for large national banks and can run longer for smaller banks that perform well. Banks receive one of four grades—outstanding, satisfactory, needs to improve or substantial noncompliance—and a poor grade can restrict their merger and branch expansion plans.

OCC, Treasury Leading Push

The Trump administration, led by Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting, has been pushing for the latest CRA revision.

Both of those officials ran into CRA trouble when they tried to sell OneWest Bank to CIT Group Inc. Mnuchin was OneWest’s chairman and Otting its chief executive.

The Treasury Department released a report on “modernizing the CRA” in April. Included in that report is a call to not allow fair lending enforcement investigations from the Consumer Financial Protection Bureau and other regulators to slow down CRA reviews.

Otting went farther, issuing a bulletin on Aug. 15 highlighting that his agency’s examiners will no longer take into account non-CRA lending violations when assessing a bank’s CRA compliance.

The FDIC and the Fed have not yet followed suit. But banks want the three agencies to set a common policy on dealing with non-CRA related enforcement actions in their community lending reviews.

“Regulators should develop consistent policies clarifying that CRA will not be used as a general enforcement tool,” the American Bankers Association said in a Nov. 15 comment letter.

There is some merit to the idea, according to David Reiss, a professor at Brooklyn Law School and the research director at the Center for Urban Business Entrepreneurship.

“It’s delinking fair lending concerns, which are regulated elsewhere, from CRA concerns. From an industry perspective that may make a lot of sense,” he said in a Nov. 30 phone interview.

The proposal, taken in a vacuum, may be reasonable. But in the context of broader attempts to weaken the CRA, it should be viewed more skeptically.

Rising Mortgage Rates

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graphic by Chris Butterworth

NBC News quoted me in Mortgage Rates Just Hit 5 Percent: What Does That Mean for Homebuyers and Owners? It opens,

Mortgage rates crossed the 5 percent line on Wednesday for the first time since 2011, marking a new era for a generation of Americans raised on super-low borrowing rates and highlighting the downside of a burgeoning national economy.

Strengthening economic growth, near-record low unemployment, inflation rates and policy moves by the Federal Reserve have all contributed to move the needle beyond the psychological 5 percent barrier.”It has only been in this decade that they have fallen below 5 percent, rates not seen since the 1960s,” said David Reiss, an expert in real estate law and professor at the Brooklyn Law School.

From 1971 through early October 2008, the average rate for a 30-year mortgage was 8.1 percent. The day before Halloween 1981, the number spiked at 18.44 percent, according to data from Freddie Mac, the government-sponsored mortgage rebundler.

Psychology aside, there’s a real money impact as well. Every increase of 10 basis points, or 0.1 percentage point, means another $6 per month per $100,000 of mortgage, said Danielle Hale, chief economist for Realtor.com.

Over the last year, the mortgage on a typically priced home of $295,000 has increased by $115 to $120 a month.

Growing monthly payments are just one of the factors contributing to tougher times for many buyers. House prices also have been on the increase, and potential homeowners must contend with the loss of the so-called SALT deductions in last year’s tax cut legislation, which complicate things in high-tax states.