Fintech and Mortgage Lending

image by InvestmentZen, www.investmentzen.com

The Trump Administration released its fourth and final report on Nonbank Financials, Fintech, and Innovation in its A Financial System That Creates Economic Opportunity series. The report differs from the previous three as it does not throw the Consumer Financial Protection Bureau under the bus when it comes to the regulation of mortgage lending.

The report highlights how nonbank mortgage lenders, early adopters of fintech, have taken an immense amount of market share from traditional mortgage lenders like banks:

Treasury recognizes that the primary residential mortgage market has experienced a fundamental shift in composition since the financial crisis, as traditional deposit-based lender-servicers have ceded sizable market share to nonbank financial firms, with the latter now accounting for approximately half of new originations. Some of this shift has been driven by the post-crisis regulatory environment, including enforcement actions brought under the False Claims Act for violations related to government loan insurance programs. Additionally, many nonbank lenders have benefitted from early adoption of financial technology innovations that speed up and simplify loan application and approval at the front-end of the mortgage origination process. Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of  technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product. (11)

I am not sure that the report has its causes and effects exactly right. For instance, why would banks be more disincentivized than other financial institutions because of False Claims Act lawsuits? Is the argument that banks have superior lending opportunities that are not open to nonbank mortgage lenders? If so, is that market segmentation such a bad thing? 

That being said, I think the report is right to highlight the impact of fintech on the contemporary mortgage lending environment. Consumers will certainly benefit from a shorter and more streamlined mortgage application process.

Decay at Donald J. Trump State Park

photo by Alan Kroeger

Yahoo News quoted me in New York’s Donald J. Trump State Park: A Story of Abandonment and Decay. It opens,

Donald J. Trump State Park is dilapidated and forgotten. No running path, no picnic table, no basketball hoop, no hiking trail, no ball field. It’s 436 acres of neglected land, overrun by weeds and brush. Most of the buildings that once stood on it have been demolished, and the few that remain are in utter disrepair: broken windows, rusted metal, corroded walls, missing or boarded-up doors and caved-in roofs.

That’s what became of the “gift” Donald Trump once gave to New York State.

Yahoo News sent several recent pictures of the park to Eric F. Trump, the president’s son and executive vice president of the Trump Organization, to see what he thinks of its current state. He responded that the state has failed to maintain the property and that he’s disappointed by what he saw in the photographs.

“It is very disappointing to see the recent pictures of the Donald J. Trump State Park. My father donated this incredible land to the State of New York so that a park could be created for the enjoyment of all New York State’s citizens,” Eric F. Trump told Yahoo News. “Despite the fact that the terms of his gift specifically required the State to maintain the Park, the State has done a poor job running and sustaining the property. While we are looking into various remedies, it is my sincere hope that going forward, the State will exercise greater responsibility and restore the land into the magnificent park it was, and should continue to be.”

In the ’90s, then businessman Trump purchased a large swath of open meadows and thick woods 45 miles north of midtown Manhattan for a reported two million dollars, with plans to build a private golf course. But Trump couldn’t get approval from the towns of Putnam Valley or Yorktown and wound up donating the land to New York State in 2006. He claimed to the media that this “gift” was worth $100 million (though this was likely his characteristic hyperbole), and received a substantial tax write-off.

On April 19, 2006, then Gov. George E. Pataki announced Trump’s “generous and meaningful gift” would become New York’s 174th state park. He said the park would protect open space, increase public access to scenic landscapes and provide recreational opportunities in the city’s far-northern suburbs.

“On behalf of the people of the Empire State, I express our gratitude to Donald Trump for his vision and commitment to preserve the natural resource of this property for the benefit of future generations,” Pataki said at the time.

Trump said, “I have always loved the city and state of New York, and this is my way of trying to give something back. I hope that these 436 acres of property will turn into one of the most beautiful parks anywhere in the world.”

The establishment of Donald J. Trump State Park combined two parcels of land: the 282-acre Indian Hill site, which straddles the border of Westchester and Putnam counties, and the 154-acre French Hill site in Westchester County. Pataki’s office touted the new park as an example of New York’s role as a national leader in stewarding the United States’ natural resources.

But the promised recreational facilities never were built. New York stopped maintaining Donald J. Trump State Park in 2010 because of budget cuts, even though its annual operation costs were only $2,500, and it was cared for by workers at nearby Franklin D. Roosevelt Park.

Randy Simons, a public information officer for the New York State Office of Parks, Recreation and Historic Preservation, told Yahoo News that the park is currently open and serves “as a passive park offering hiking, birdwatching and similar outdoor recreational activities.”

Simons explained that the office recently removed several vacant and shabby buildings to address potential public safety and environmental hazards. This consisted of demolishing a 3,700-square-foot house, four other structures and a swimming pool. They also conducted asbestos and lead paint abatement.

 “Trail planning is underway for a formalized hiking trail network and mountain bike trails. The first step is a natural resources review and state environmental quality review to ensure that sensitive wetlands and plant and animal habitats are protected,” Simons said. “The ultimate timeline will be determined by this review.”

*     *     *

How much Trump benefited from donating the land is difficult to determine. Bridget J. Crawford, a professor at Pace University School of Law in nearby White Plains, N.Y., and a member at the American Law Institute, said it’s quite common for wealthy people to donate real property to a state or a local government for a park. The Rockefeller family, for instance, donated the Rockefeller State Park Preserve in Sleepy Hollow, N.Y., little by little starting in 1983.“

“There’s nothing unusual about the donation,” Crawford told Yahoo News. “The problem of course here is that the donation of land was made but there was no additional cash gift made in order to maintain or create the park. It seems the state and municipalities don’t have the money to do that. If these sort of deals ‘fail,’ it’s always because of lack of funding.”

Crawford’s scholarship focuses on wealth transfer taxation and property law. She said people who are serious about establishing open space parks that the public can use in meaningful ways often make substantial cash contributions as well to fund the park’s maintenance.

As for how much money Trump saved, it would depend on what valuation the IRS accepted for the land; the figure of $100 million was Trump’s unofficial estimate, for public consumption. Another variable is whether he personally owned the property or purchased it via a pass-through entity like an LLC. Crawford explained that if it were owned through an LLC that was ignored for income tax purposes, which is not unusual, a $100 million donation would have saved Trump about $35 million in taxes.

Nevertheless, it seems unlikely that the IRS would accept a $100 million appraisal of land that was sold for a few million dollars at fair market value in the 1990s.

David Reiss, a professor of law at Brooklyn Law School who focuses on real estate finance and community development, said he doesn’t doubt that Trump got an appraisal that “pushed the limits” to price it as high as possible, a move that is not uncommon. He said it’s possible that Trump got an appraisal that determined he would make more money by donating the land than he would by selling it. And it wouldn’t have to be as high as $100 million.

“If he claimed it was worth $10 million and he bought it for two or three million dollars, it’s conceivable that he came out ahead with this donation,” he said. “He actually could be better off financially. And this is not just for Donald Trump, but any donor in a comparable situation.”

Trust for Trump

photo by David R. Tribble

US News & World Report quoted me in Here’s What We Know About Donald Trump’s Trust Fund. It opens,

With all the talk about how Donald Trump will be handling his vast business empire as he assumes the presidency, some questions were finally answered this week, and this much is clear: Donald Trump is putting his business assets in a trust.

“Through the trust agreement, he has relinquished leadership and management of the Trump Organization to his sons Don and Eric, and a longtime Trump executive, Alan Weiselberg,” says Sheri Dillon, a lawyer for the president-elect.

But what does that mean?

What is a trust to begin with? A trust is a legal structure with three main parties: The trustor, trustee and beneficiary. The trustor gives another party, the trustee, the right to manage the specified assets for the benefit of its designated beneficiaries.

“According to Trump, his sons, Donald Jr. and Eric, as well as a business associate, would be the trustees. After transferring the assets to the trust, Trump could then be a beneficiary of the trust,” says David Reiss, professor of law at Brooklyn Law School. “The trustees administer the affairs of the trust on behalf of the beneficiaries. The beneficiary receives the income from the trust or the property within the trust.”

Trump has previously said his children will be the primary financial beneficiaries of the trust, but Trump made it clear that he planned on returning to the Trump Organization when his presidency is over. At that point, it’s possible Trump could have a fat check waiting for him, depending on the trust’s structure.

“The trust’s income or property could be doled out on an ongoing basis or deferred to some future point in time, depending on the terms of the trust,” Reiss says.

The Cost of Selling Trump’s Empire

photo by KylaBorgPolitico quoted me in Selling His Empire Would Cost Trump Money. A Lot of It. It opens,

Donald Trump’s critics say the only way for him to keep his business interests separate from the public’s interest is to simply get out of business entirely, selling his companies and putting the proceeds into anonymous assets that someone else can manage.

But there’s nothing simple about it: unloading a real estate empire as large as Trump’s is a lengthy, complicated process fraught with ethical pitfalls, one that could end up costing a fortune.

“He has to make a choice,” said David Reiss, director of Brooklyn Law’s Center for Urban Business Entrepreneurship. “How much pain is he willing to take?”

Trump, who’s expected to lay out a plan to address conflicts of interest at a press conference Wednesday, heads a particularly difficult estate to unwind. Forbes has pegged his net worth at $3.7 billion in September, attributing most of that to real property holdings tangled in debt, partnership agreements, management contracts, branding deals and tax deferrals.

Ethics watchdogs say Trump’s cleanest break would be to sell his company to the public, but an initial public offering — especially one that folds in most or all of Trump’s scattered businesses — would be complicated, costly and time-consuming.

“The nature of the business doesn’t lend itself to going public,” said Jan Baran, co-chair of Wiley Rein’s election law and government ethics practice. “Rolling in all the real estate and the royalty contracts and all the other orphans like wineries and steaks, it’s a little hard to imagine any public companies that resemble what his business is, because it’s such a hodgepodge of things. It would take a while, it would take at least a year.”

What’s more, Baran noted, an IPO would require underwriters to raise capital and pull together an offering — raising new concerns about investment firms potentially currying favor with the new administration.

“Are the ethics complainers willing to let Goldman Sachs do the underwriting on this public offering?” he said. “Somebody’s got to put it together.”

Even if Trump chose to skip the IPO and just liquidate his assets via direct sales, he’d face a complex task — and a costly one.

“This would be an extraordinarily difficult situation,” said Neil Shapiro, a law partner at Herrick Feinstein in New York. “It would certainly be unprecedented in terms of somebody liquidating a portfolio of this size. We’re in uncharted territories here.”

The problems start with finding a buyer. The pool of people shopping for, say, a Fifth Avenue skyscraper is small, and only the buyer and seller can say for sure whether the price paid is fair. As such, selling a property raises nearly as many ethical quandaries for Trump as owning it. A buyer looking to curry favor with the next president might pay too much. Another might do Trump a favor by making a quick deal while paying too little.