Tag Archives: Reiss

What Is Compound Interest?

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photo by Roman Oleinik

US News & World Report quoted in What Is Compound Interest? It opens,

When it comes to investing, compound interest really is the most powerful force in the universe. Remarkable in both its simplicity and its power, compound interest is the concept of reinvesting, along with the original principal sum, the interest earned on your investment.

As a result, you earn interest on top of interest, and then more on top of that larger sum, and so on. “Over time, a small amount of money can become a mountain of money,” says David Winters, CEO of Wintergreen Advisers.

Compound interest is one of the most basic concepts for investors to understand, in no small part because its magical results work the same whether you have $100 or $100 million.

In that sense, it’s every investor’s secret weapon – and you probably want to use your secret weapon if it can help you build your retirement nest egg (which it can). Unfortunately, if you look at how the average American spends and invests, it doesn’t reflect a great respect or understanding of compound interest.

It’s time to change that.

Proving its power in a thought experiment. David Reiss, professor of law at Brooklyn Law School, likes to convey the profound power of compound interest with a riddle of sorts.

“Would you rather receive a gift on Jan. 1 of $1 million, or a penny that doubles every day for the rest of the month?” Reiss says. “Most kids would go for the million bucks, but those who are patient enough to do the math know that they can get millions more if they are patient enough to wait the month.”

It’s true. The penny-doubler would in fact finish January with $9.7 million more than his or her instant gratification-seeking friend.

When Buyers Change Their Minds

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The Wall Street Journal quoted me in When Home Buyers Change Their Minds (behind paywall). It opens,

The offer was accepted. The mortgage was approved. What happens when the buyer gets cold feet and wants to back out of the deal?

Jason Michael faced this issue about 18 months ago when he listed his three-bedroom home in St. Louis. Mr. Michael, a 36-year-old public-relations executive, asked $130,000 for his home and accepted an offer for $127,000. The buyers posted a $1,000 deposit of “earnest money,” completed inspections, negotiated repairs and were approved for a mortgage.

Then they told Mr. Michael that they had found another house and didn’t want to move ahead with the purchase.

While the contract allowed Mr. Michael to pocket the deposit if the buyers defaulted, they refused to authorize their agent to release it. Only after Mr. Michael threatened to sue did they surrender the $1,000.

“My agent had said that people don’t back out of house purchases—that this won’t happen,” Mr. Michael says. “But now I approach it as if the buyer can back out until the very last minute.” He ultimately decided to rent out the house.

According to an online survey of 2,241 adults conducted for finance website Nerdwallet.com in January, home-buyer’s remorse isn’t uncommon. Nearly half (49%) of homeowners who responded said they would do something differently if they had to go through the process again. Broken down by age group, 61% of Generation Xers (the mid-1960s through the 1970s) and 57% of millennial homeowners (born in the early 1980s through about 2004) indicated they had regrets. Many wished they had bought a bigger home or saved more money before buying.

*     *      *

Here are a few things to consider if you might want to back out of your real-estate contract. Buyers and sellers should consult a qualified real-estate attorney for advice.

• Craft carefully. Rather than having a mortgage contingency allowing you to obtain a mortgage “at prevailing rates,” specify that the mortgage rate can be no more than 4%, for example. Or, consider making the contract contingent on the mortgage actually being funded by the lender. “This extends the contingency all the way to the closing,” says David Reiss, a Brooklyn Law School professor who specializes in real estate.

• Sharpen your negotiation skills. Even if you can’t back out legally, try to negotiate a reduction or return of the deposit with the seller. In a market where prices are rising and the homeowner can get a higher price for their home, there might be a chance to come to terms.

• Remember the broker. Even if the seller lets the buyer off the hook, he may still be liable to the broker for the commission. Contracts state that the commission is due when the broker finds a ready, willing and able buyer. Many brokers will work with the seller in this situation, Mr. Haber says, but it is an issue that needs to be addressed.

 

Is There a Bipartisan Fix for Fannie and Freddie?

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photo by DonkeyHotey

The Hill published my latest column, Congress May Have Finally Found a Bipartisan Fix to Fannie and Freddie. It reads,

It is welcome news to hear that Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) are looking to craft a bipartisan solution to the problem of Fannie Mae and Freddie Mac. The two massive mortgage companies have been in conservatorship since 2008 when they were on the verge of failing. At that time, nobody, just nobody, believed that they would still be in conservatorship nearly a decade later.

But here we are. Resolving this situation is of great importance to the financial well-being of the nation. These two companies guarantee trillions of dollars worth of mortgages and operate like black boxes, run by employees who don’t have a clear mission from their multiple masters in government.

This is the recipe for some kind of crisis.Maybe they will not underwrite their mortgage-backed securities properly. Maybe they will undertake a risky hedging strategy. We just don’t know, but there is reason to think that gargantuan organizations that have been in limbo for ten years may have developed all sorts of operational pathologies.

There have been a couple of serious attempts in the Senate to craft a long-term solution to this problem, but it was not a high priority for the Obama Administration and does not yet appear to be a high priority for the Trump Administration. Deep ideological divisions over the appropriate role of the government in the mortgage have also stymied progress on reform.

Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, leads a faction that wants to dramatically reduce the role of the government in the mortgage market. Sen. Elizabeth Warren (D-Mass.) leads a faction that wants to ensure that the government plays an active role in making homeownership, and housing more generally, more affordable to low- and moderate-income households. At this point, it is not clear whether a sufficiently broad coalition could be cobbled together to overcome the opposition to a compromise at the two ends of the spectrum.

2017 presents an opportunity to push reform forward, however. The terms of the conservatorship were changed in 2012 to require that the Fannie and Freddie reduce their capital cushion to zero by the end of this year. That means that if Fannie or Freddie has even one bad quarter and suffers losses, something that is bound to happen sooner or later, they would technically require a bailout from Treasury.

Now, such a bailout would not be such a terrible thing from a policy perspective as Fannie and Freddie have paid tens of billions of dollars more to the Treasury than they received in the bailout. But politically, a second bailout of Fannie or Freddie would be toxic for those who authorize it.

Some are arguing that we should kick the can down the housing finance reform road once again, by allowing Fannie and Freddie to retain some of their capital to protect them from such a scenario. But Corker and Warner seem to want to use the Dec. 31, 2017 end date to focus minds in Congress. They, along with some other colleagues, have warned Fannie and Freddie’s conservator, Federal Housing Finance Agency Director Mel Watt, not to increase the capital cushion for the two companies. They claim that it is Congress’ prerogative to make this call.

The conventional wisdom is that the stars have not aligned to make housing finance reform politically viable in the short term. The conventional wisdom is probably right because the housing finance system is working well enough for now. Mortgage rates are very low and while access to credit is a bit tight, it is not so tight that it is making headlines. So perhaps Senators Corker and Warner are right to use the fear factor of future bailouts as a goad to action.

Housing finance reform requires statesmanship because there are no short-term gains that will accrue to the politicians that lead it. And the long-term gains will be very diffuse – nobody will praise them for the crises that were averted by their actions to create a housing finance system fit for the 21st century. But this work is of great importance and far-thinking leaders on both sides of the aisle should support a solution that takes Fannie and Freddie out of the limbo of conservatorship.

It will require compromise and an acceptance of the fact that the perfect is the enemy of the good. But if compromise is reached, it may help to avoid another catastrophe that will be measured in the hundreds of billions of dollars. And it will ensure that we have a mortgage market that meets the needs of America’s families.

Prepaying Your Mortgage

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photo by www.aag.com

Newsday quoted me in Paying off Your Mortgage Early Might not Make Sense (behind paywall). It opens,

There are few greater feelings than making that last mortgage payment. Some people feel better still if they pay it off early. But sometimes it doesn’t make sense to pay off your mortgage early.

First things first: Be sure you have adequate emergency savings before you put extra money into paying off the mortgage early. Then consider what’s the best use of any extra money you have.

While taking a shorter-term mortgage or prepaying principal saves you tons in interest, remember that mortgage interest is typically tax deductible.

Warren Goldberg, founder of Mortgage Wealth Advisors in Melville, offers an example. If you had a 5 percent interest rate on your 30-year fixed mortgage, depending on your tax bracket, your equivalent, after-tax interest rate might only be 3.3 percent. Even in today’s tumultuous market, it’s not difficult to earn a return greater than 3.3 percent after taxes.

“By paying the minimum on your mortgage and investing the balance, your money can be working for you. Your investments can be earning more than the interest you are paying,” says Goldberg.

David Reiss, a professor at Brooklyn Law School specializing in real estate, agrees: “If you have not maxed out your retirement savings, it might make sense to direct your extra funds to tax-advantaged retirement accounts. You could end up being better off overall as those accounts grow tax-free over time.”

Manafort’s Real Estate Deals

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Paul Manafort

WNYC quoted me in Paul Manafort’s Puzzling New York Real Estate Purchases. The story opens,

Paul J. Manafort, the former Trump campaign manager facing multiple investigations for his political and financial ties to Russia, has engaged in a series of puzzling real estate deals in New York City over the past 11 years.

Real estate and law enforcement experts say some of these transactions fit a pattern used in money laundering; together, they raise questions about Manafort’s activities in the New York City property market while he also was consulting for business and political leaders in the former Soviet Union.

Between 2006 and 2013, Manafort bought three homes in New York City, paying the full amount each time, so there was no mortgage.

Then, between April 2015 and January 2017 – a time span that included his service with the Trump campaign – Manafort borrowed about $12 million against those three New York City homes: one in Trump Tower, one in Soho, and one in Carroll Gardens, Brooklyn.

Manafort’s New York City transactions follow a pattern: Using shell companies, he purchased the homes in all-cash deals, then transferred the properties into his own name for no money and then took out hefty mortgages against them, according to property records.

Buying properties using limited liability companies – LLCs – isn’t unusual in New York City, nor is borrowing against a home to extract money. And there’s no indication that Manafort’s New York real estate borrowing spree has come to the attention of investigators. In an emailed statement, Manafort said: “My investments in real estate are personal and all reflect arm’s-length transactions.”

Three Purchases, Lots of Questions

Manafort’s 2006 purchase of a Trump Tower apartment for all cash coincided with his firm’s signing of a $10 million contract with a pro-Putin Russian oligarch, Oleg Deripaska, that was revealed last week in an investigative report by The Associated Press.

For the Carroll Gardens home, a brownstone on Union Street, Manafort recently borrowed nearly $7 million on a house that was purchased four years ago for just $3 million. The loans – dated January 17, three days before President Trump’s inauguration – were made by a Chicago-based bank run by Steve Calk, a Trump fundraiser and economic advisor.

Nine current and former law enforcement and real estate experts told WNYC that Manafort’s deals merit scrutiny. Some said the purchases follow a pattern used by money launderers: buying properties with all cash through shell companies, then using the properties to obtain “clean” money through bank loans. In addition, given that Manafort is already under investigation for his foreign financial and political ties, his New York property transactions should also be reviewed, multiple experts said.

One federal agent not connected with the probes, but with experience in complex financial investigations, said after reviewing the real estate documents that this pattern of purchases was “worth looking into.” The agent did not want to speak for attribution. There are active investigations of Manafort’s Russian entanglements by the FBI, Treasury, and House and Senate Select Committees on Intelligence. Manafort has denied wrongdoing and has called some of the allegations “innuendo.”

Debra LaPrevotte, a former FBI agent, said the purchases could be entirely legitimate if the money used to acquire the properties was “clean” money. But, she added, “If the source of the money to buy properties was derived from criminal conduct, then you could look at the exact same conduct and say, ‘Oh, this could be a means of laundering ill-gotten gains.’”

Last spring, the Obama Treasury Department was so alarmed by the growing flow of hard-to-trace foreign capital being used to purchase real estate through shell companies that it launched a special program to examine the practice within its Financial Crimes Enforcement Network, or FinCen. The General Targeting Order, or GTO, required that limited liability company disclose the identity of the true buyer, or “beneficial owner,” in property transactions.

In February, FinCen reported initial results from its monitoring program: “about 30 percent of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report,” it said. The Trump Treasury Department said it would continue the monitoring program.

Friends and Business Partners

According to reports, Manafort was first introduced to Donald Trump in the 1970s by Roy Cohn, the former aide to Senator Joseph McCarthy who went on to become a prominent and controversial New York attorney.

Long active in GOP politics, Manafort also worked as a lobbyist for clients who wanted something from the politicians he helped elect. His former firm – Black, Manafort, Stone and Kelly – represented dictators like Ferdinand Marcos of the Philippines and Mobuto Sese Seko of Zaire.

In the 2000s, Manafort created a new firm with partner Rick Davis. According to the recent investigative report by The Associated Press, Manafort and Davis began pursuing work in 2005 with Oleg Deripaska, one of the richest businessmen in Russia. Manafort and Davis pitched a plan to influence U.S. politics and news coverage in a pro-Putin direction, The AP said.

“We are now of the belief that this model can greatly benefit the Putin government if employed at the correct levels with the appropriate commitment to success,” Manafort wrote in a confidential strategy memo obtained by The AP.

In 2006, Manafort and Davis signed a contract to work with Deripaska worth $10 million a year, The AP reported.

Also that year, a shell company called “John Hannah LLC” purchased apartment 43-G in Trump Tower, about 20 stories down from Donald Trump’s own triplex penthouse. Manafort confirmed that “John Hannah” is a combination of Manafort’s and Davis’s respective middle names.

The LLC was set up in Virginia at the same address as Davis Manafort and of a Delaware corporation, LOAV, Ltd., for which there are virtually no public records. It was LOAV that signed the contract with Deripaska – not the “public-facing consulting firm Davis Manafort,” as the AP put it.

A lawyer for John Hannah LLC signed the deed on apartment 43-G for $3.675 million in November of 2006. But Manafort’s name did not become associated formally with the Trump Tower apartment until March of 2015, three months before Trump announced he was entering the presidential race in the lobby 40 stories down. On March 5, John Hannah LLC transferred the apartment for $0 to Manafort. A month later, he borrowed $3 million against the condo, according to New York City public records.

A year later, Manafort was working on Trump’s campaign, first as a delegate wrangler, then as campaign manager. Trump’s friend and neighbor had become a top advisor.

In a text message that was hacked and later obtained by Politico, Manafort’s adult daughter, Jessica Manafort, wrote last April: “Dad and Trump are literally living in the same building and mom says they go up and down all day long hanging and plotting together.”

In August 2016, The New York Times published a lengthy investigation of Manafort, alleging he’d accepted $12.7 million in undisclosed cash payments from a pro-Putin, Ukrainian political party between 2007 and 2012. Manafort resigned as campaign manager, but according to multiple reports, didn’t break off ties with Trump, who remained his upstairs neighbor.

The White House press secretary, Sean Spicer, said last week that Manafort “played a very limited role for a very limited period of time” in the Trump campaign.

Davis did not return WNYC’s calls for comment, but in an email exchange with The AP, he disavowed any connection with the effort to burnish Putin’s image. “My name was on every piece of stationery used by the company and in every memo prior to 2006. It does not mean I had anything to do with the memo described,” Davis said.

Buy. Borrow. Repeat.

Trump Tower 43-G was not Manafort’s only New York property.

In 2012, another shell company linked to Manafort, “MC Soho Holdings LLC,” purchased a fourth floor loft in a former industrial building on Howard Street, on the border of Soho and Chinatown, for $2.85 million. In April 2016, just as he was ascending to become Trump’s campaign manager, Manafort transferred the unit into his own name and borrowed $3.4 million against it, according to publicly available property records.

The following year, yet another Manafort-linked shell company, “MC Brooklyn Holdings,” purchased a townhouse at 377 Union Street in Carroll Gardens for $2,995,000. This transaction followed the same pattern: the home was paid for in full at the time of purchase, with no mortgage. And on February 9, 2016, just after Trump won decisive victories in Michigan and Mississippi, Manafort took out $5.3 million of loans on the property.  (Some of these transactions were first reported by the blog Pardon Me For Asking, and by two citizen journalists at 377union.com.)

Though the deals could ultimately be traced to Manafort, his connection to the shell companies would not likely have emerged had Manafort not become entangled in multiple investigations.

Public records dated just days before Trump was sworn in as President show that Manafort transferred the Carroll Gardens brownstone from MC Brooklyn Holdings to his own name and refinanced the loans with The Federal Savings Bank, in the process taking on more debt. He now has $6.8 million in loans on a building he bought for $3 million, records show.

David Reiss, a professor of real estate law at Brooklyn [Law School], initially expressed bafflement when asked about the transactions. Reiss then looked up the home’s value on Zillow, a popular source for estimating real estate values. The home’s “zestimate” is $4.5 to $5 million.

Reiss said unless there is another source of collateral, it is extremely unusual for a home loan to exceed the value of the property. “I do think that transaction raises yellow flags that are worth investigating,” he said.

Judge Gorsuch v. Uncle Sam

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The Hill published my latest column, Where Does Judge Gorsuch Stand on Limiting the Federal Government? It opens,

This week, all eyes are on Judge Gorsuch’s confirmation hearing for a seat on the Supreme Court. While Gorsuch has not explicitly stated that he wants to drown or deconstruct the federal government, there is troubling language in his opinions that indicates that he shares that goal. While this will hearten many a Tea Partyer, moderate Republicans along with Democrats should be wary of someone who does not value the good that the federal government can and does do.

His opinion in Caring Hearts Personal Home Services v. Burwell describes a federal government that has ceased to function rationally: “The number of formal rules [administrative] agencies have issued thanks to their delegated legislative authority has grown so exuberantly it’s hard to keep up. The Code of Federal Regulations now clocks in at over 175,000 pages. And no one seems sure how many more hundreds of thousands (or maybe millions) of pages of less formal or ‘sub-regulatory’ policy manuals, directives, and the like might be found floating around these days.”

He continues, “This case has taken us to a strange world where the government itself — the very ‘expert’ agency responsible for promulgating the ‘law’ no less — seems unable to keep pace with its own frenetic lawmaking. A world Madison worried about long ago, a world in which the laws are ‘so voluminous they cannot be read’ and constitutional norms of due process, fair notice, and even the separation of powers seem very much at stake.”

While this opinion draws a colorful picture of a topsy-turvy government that plays well to the crowd, the fact is that the federal government runs pretty well given its size and complexity. Indeed, employees of large and profitable corporations can often be heard making the same kind of complaints about their employers. All large organizations have their catch-22s, their inconsistencies, their maddening snafus. But the fact remains that large organizations have been remarkably successful at navigating the modern world.

Gorsuch’s lazy originalism, with musings of Madison’s concerns about a legal code so massive that it is unknowable, may have packed a punch at the dawn of the administrative state a hundred years ago. Today it misses its mark. Indeed, the first lesson I teach my law students is that their job is not to know what the law is in advance, but rather to be able to figure it out when a case presents itself. The same could be said of any professional. A doctor need not know all of the medical literature. She just needs to be able to search it in order to diagnose her patient. In fact, the massive code is pretty knowable. Just use Google. It’s all there.

For those of us who work for large organizations, who deal with large amounts of data, who crisscross the world’s borders, who do business over state lines, we know that we can survive and thrive in this complex world. And there simply is no alternative. To deny this is to pander to silly romantics who pine for a time that passed more than a century ago for most people: when you only did business with your neighbors, when your justice of the peace lived down the block and when you walked to your job across town.

President Trump knows this. His businesses are scattered across the globe. Steve Bannon knows this. He worked at Goldman Sachs. And Judge Gorsuch certainly knows this. But they also know that people like to hear that we can go back to a simpler time that never really existed for most Americans.

We do not need that kind of patronizing nostalgia in the Supreme Court. Our ninth justice should be one who can craft solutions to our 21st century legal problems that are based on the values embodied in the Constitution, not the facts of life of a bygone era.