Tag Archives: Trump

Move Fast and Break the Mortgage Market

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Bill Pulte, FHFA Director and Chair of Fannie Mae & Freddie Mac

I was quoted in the American Prospect’s story, Move Fast and Break the Mortgage Market. It reads, in part,

This week, the Donald Trump–appointed chief regulator for the two quasi-governmental companies that own or control about half of the residential housing market anointed himself the board chair of both those companies. This maneuver could signal a host of shenanigans: the culmination of a 17-year hedge fund get-rich-quick scheme, a balance-sheet fiction to justify tax cuts, a new favor factory for apartment developers with ties to the president, a data transfer so Elon Musk’s everything app can learn how to sell mortgages, or something equally problematic.

But what gives former board members, market observers, and officials at the regulator greater concern is the distinct possibility that mucking around with the $7.7 trillion secondary mortgage market could lead to breaking it.

If that happens, homebuyers may not be able to get mortgages, homebuilders may be reluctant to break ground, and uncertainty would abound in a market that has brought down the economy on more than one occasion in U.S. history, most recently in 2008. “It could freeze sales, freeze refinances, stop people from forming households, cause people to be afraid of moving, freeze up developers of housing and the secondary market,” said David Reiss, a professor at Cornell Law School.

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Multifamily Glad-Handing

The GSEs have a pretty sober business on the single-family side, and since the housing collapse really originated there, a lot of work was done to clean up that part of the business. But Fannie and Freddie also make loans in the multifamily market to support building of apartments and condos. A former official with one of the GSEs told me that business is a little looser, with ways to enhance those loans.

This president, of course, is a multifamily real estate developer himself, who has friends in multifamily real estate development. Hamara, one of the new board members, is a vice president at Tri Pointe Homes, a major homebuilder. You could imagine these relationships leading to the GSEs pushing risk limits, loosening credit standards, or raising loan-to-value ratios for favored borrowers. There is a secret mortgage blacklist at Fannie Mae for condos without enough property insurance or in need of repairs; controlling the board could make that blacklist go away, at least for certain developers.

This kind of setup resembles the opportunity zones that were a feature of the 2017 Trump tax cuts. They gave significant tax breaks to investors in certain communities deemed in need of development. Trump administration officials credit opportunity zones with increasing housing construction, but critics argue that the investments were rife with corruption and favor-trading.

That could also be the case here: New criteria guiding the new boards might lead to more multifamily housing, but with uneven results, favors to friends, and idiosyncratic deals that would be more about boosting allies than building housing. And as Calabria has pointed out, Fannie and Freddie are likely under Trump to cancel affordable-housing initiatives, meaning that sweetheart deals might only extend to the developers, rather than the public. Plus, there is the potential for dramatic losses if lending standards erode.

Reiss, of Cornell, agreed that this was all a possibility. “If someone gets to one of the directors, and they are there not acting as a fiduciary for the company, it opens the door to political favoritism,” he said.

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What If It Breaks

Pulte is expected to force job cuts at the GSEs, which employ roughly 15,000 people. He has already been making familiar noises about DEI and remote work. One possibility on the table at the GSEs is merging Fannie and Freddie; you don’t usually have the same person chair the boards of two direct competitors. The regulatory agency is also likely to see cuts; already at FHFA, according to one source, fair lending and consumer protection groups have been put on administrative leave, along with employees at the Division of Research and Statistics.

Controlling the boards would limit dissent about these actions. But cuts in the name of efficiency could strain or even rupture the numerous functions the GSEs carry out, with consequences for the entire housing market.

Due to the conservatorship, the GSEs are limited in what they can pay their employees, which has led to a talent drain. Some systems have not been integrated, and others are not up to industry standards. Fannie and Freddie have a cautious internal culture that doesn’t move quickly. Hacking away at their already weakened structure could easily create operational harm.

But Reiss explained that nothing has to overtly break to lose the confidence of the markets; even a lack of workforce to move the paper around could create that impression, and disrupt the flow of credit. “If there is any kind of uncertainty, the spread between Fannie and Freddie securities and Treasury bonds will increase,” he said. “Investors will ask if the government will make good on Fannie and Freddie bonds. This uncertainty and direction could increase costs over time for all borrowers.”

Debranding Trump

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Dano CC BY 2.0 DEED

Agence France-Presse (AFP) quoted me in Posts Falsely Say Trump Name Erased from New York Properties. It reads, in part,

“We have already seen cases where Trump’s name has been removed from a property because the owner no longer thought it benefited the property,” David Reiss, professor at Brooklyn Law School, confirmed to AFP on October 4.

In September 2023, it was also reported that Trump would sell his multimillion-dollar lease on a public golf course in the Bronx to the Bally’s casino chain . . . “naming rights are often a separately negotiated item. For instance, companies pay millions of dollars to get naming rights to stadiums,” Reiss explained.

Both the Trump Tower and Trump Park Avenue, for example, still bear the former president’s name and remain under his ownership, as of this writing, a member of buildings staff confirmed to AFP by telephone.

AFP contacted the Trump Organization for further comment, but a response was not forthcoming.

While exceptions happen, Reiss noted that “generally when a party gives up ownership or control of a property, their name goes with them.”

 

 

 

Trump’s Real Estate Valuations: They Mean Just What He Chooses

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illustration by Sir John Tenniel

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.’

 

The Daily Beast quoted me in Trump’s Bank Fraud Defense ‘Defies the Laws of Physics.’ It reads, in part,

Donald Trump’s colossal trial for faking property values starts next Monday, and one mind-boggling issue has emerged as his weakest defense yet: the idea that his past lies on financial statements were justified because prices eventually went up anyway.

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“What he is saying is completely inconsistent with how real estate professionals talk about valuations,” said David Reiss, a Brooklyn Law School professor who specializes in real estate finance.

“When you talk about valuations at a given time, you’re talking about what its value is at that time. It becomes more valuable in the future, but that’s its value at the time,” Reiss said.

That means Trump’s 2014 financial statement should have, naturally, captured the value of any given building or land at that time.

To better understand why Trump’s excuse is bonkers requires a quick review of the three basic methods to assess value employed by professional property appraisers.

One is the income approach: What income a particular property is currently generating? That doesn’t account for the future, Reiss said.

Another is the cost approach: How much does it cost to replace the property? That doesn’t consider the future either, Reiss made clear.

The third is the sales comparison approach: What are similar parcels and comparable properties selling for? This could include future expectation of development, Reiss explained. After all, sale prices are determined by supply and demand—and a fundamental concept in economics dictates that demand can be affected by consumer expectations of future price changes.

As usual, Trump’s logic seems to careen off the rails and focus solely on his property’s future value. But Trump simply can’t do that because he wants to.

“That’s not how the legal system works or how the real estate industry works… if everybody could say that, nobody could be accused of a lie. We would all do whatever the heck we want,” Reiss said.

Reiss likened Trump redefining time-bound questions on financial forms to the way Humpty Dumpty makes up words in Lewis Carroll’s sequel to Alice’s Adventures in Wonderland. The law professor read a passage in which Alice took issue with the Eggman’s improper use of the word “glory.”

Humpty Dumpty smiled contemptuously. “Of course you don’t—till I tell you. I meant ‘there’s a nice knock-down argument for you!’”

“But ‘glory’ doesn’t mean ‘a nice knock-down argument,’” Alice objected.

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

The NYAG Lawsuit against Trump

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NY Attorney General James

I was interviewed by Reuters in Explainer: What New York’s lawsuit means for Trump regarding the lawsuit that New York Attorney General James filed against former President Trump and others in his circle. The video is here. The transcript reads in part,

The lawsuit seeks to have Trump and the other defendants give up $250 million in what she says were false financial gains.

James is also seeking to bar Trump and three of his children – Donald Trump Jr, Eric Trump and Ivanka Trump – from serving as directors of companies registered in New York…

and prevent them and their company from buying commercial real estate or getting bank loans in New York state for five years.

She is also seeking to appoint an independent monitor at the Trump Organization to oversee various aspects of its business for five years.

Trump, who is considering running again for president in 2024, is expected to contest the litigation. But David Reiss, a professor at Brooklyn Law School, sees another possibility…

“…He’s been very effective at pushing final outcomes in his legal battles years down the road, and maybe that’s a good enough strategy for him. That’s possible. The other possibility, even though he doesn’t say this on Twitter, is he may settle.”

Can NYS Rename Trump State Park?

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photo by Jeffrey Putman

Politifact quoted me in Can New York State Rename Donald J. Trump State Park? It reads,

Even after officially decamping for Palm Beach, Fla., former President Donald Trump has continued to stir emotions in his previous home state of New York.

New York Assemblywoman Sandy Galef, a Democrat, said she believes a park currently named for Trump north of New York City should be renamed. Trump donated the land for the park, and it was agreed at the time it would be named after him.

In a Jan. 14 letter to Erik Kulleseid, the Parks, Recreation and Historic Preservation Commissioner in New York, Galef wrote, “It is my understanding that Mr. Trump did not sign the appropriate documents with the state, rendering any claim of breach of contract moot. We can and should rename the park.”

In an interview, Galef added that the park “really hasn’t been fixed up” and that efforts to do so would be hobbled by having Trump’s name on it. Galef said she believes the park should instead be named after former New York Gov. George Pataki, a Republican.

“Around this area, when you have ‘Trump’ on the name of something, it doesn’t go over very well,” Galef said. “My concern is that people aren’t going to want to put money into Trump Park, whether it’s state dollars or any private dollars.”

Galef has support in her quest to rename the park: On Feb. 11, a bill advanced in the Assembly to continue talks on renaming the park.

But the former president may pursue litigation against the state if the Parks Department decides to rename the park, a Trump spokesman said.

“Despite the fact that the state has done a horrible job running and maintaining the park in question, an utter disgrace to such incredible land and a generous donation, the conditions of this gift, formally documented and accepted by the state of New York, could not be clearer: the park must bear Trump’s name,” Trump’s office said in a statement. “This would be breaching its agreement by removing Trump’s name, and Trump will take whatever legal action that may be necessary to fully enforce his rights under this agreement.”

Is Galef right that New York state could change the name without too much difficulty? The answer isn’t clear enough for us to render a Truth-O-Meter verdict. But we decided to take a look at the issue and explain what we found.

How the park came to be

Donald J. Trump State Park sits on the border of Putnam and Westchester counties along the Taconic Parkway. Trump gave the land to New York State in 2006 after the former president failed in building a golf course on it.

The land deed for the property does not include any naming provisions, but the state named the park after Trump based on a letter of agreement between the Parks Department and Trump’s lawyers.

The letter outlined several terms, one of which is the following: “Each of the properties will bear a name which includes Mr. Trump’s name, in acknowledgment of these gifts. The name will be prominently displayed at least at each entrance to each property.”

The letter includes signatures by Trump’s lawyers and by Trump himself, and it was “acknowledged and accepted” by James Sponable, who was then the Parks Department’s director of real property.

The New York State Attorney General’s office referred questions about the park’s possible renaming to the Parks Department. The Parks Department did not respond to multiple requests for comment.

But legal experts say it isn’t clear how ironclad the terms in the letter are.

“The land is called a gift, so this seems to be memorializing the terms of a gift,” David Reiss, a real estate law specialist at Brooklyn Law School, told PolitiFact. “So, one question is, ‘What’s the enforceability of this letter?’ It’s not obvious to me that this would be analyzed as a contractual dispute.”

Reiss said because the letter does not clearly state that it is a binding contract, it is unclear how a court would treat it if the state were to rename the park and Trump legally challenged it.

“The letter says, ‘We have this understanding,’ but it doesn’t say what would happen if the understanding isn’t held to,” Reiss said. “It doesn’t say what would happen if, at some later time, it changed. There is no promise that the naming would be perpetual. So it’s unclear what Trump’s rights would be to enforce this based on the language of this document.”

Ultimately, Reiss said, “the one sure thing is there could be a lot of litigation about these issues, if the parties chose to litigate.”

A possible plan B

As an alternative, Galef said Trump’s name could be removed from a sign on the Taconic Parkway, which is the most common way for motorists to see it. The letter “doesn’t say you have to have a sign on the Taconic Parkway, … That could come down,” Galef said in the interview.

Reiss, the legal expert, agreed with Galef’s interpretation and said that it might be a feasible option.

“The sign on the Taconic is not the entrance of the park, so you could comply with the letter and still take that sign down,” he said. “It might be confusing to people if you say, ‘Unnamed State Park, next right,” but if you stuck to the black letter of this letter, you could say, ‘Right at the entrance of the park is where we’re going to put the sign, but nowhere before.’”

Housing Finance Reform Endgame?

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The Hill published my column, There is Hope of Housing Finance Reform That Works for Americans.  It opens,

The Trump administration released its long awaited housing finance reform report and it is a game changer. The report makes clear that it is game over for the status quo of leaving Fannie Mae and Freddie Mac in their conservatorship limbo. Instead, it sets forth concrete steps to recapitalize and release the two entities. This has been a move that investors, particularly vulture investors who bought in after the two companies entered into their conservatorships, have clamored for.

It is not, however, one that is in the best interests of homeowners and taxpayers. The report recognizes that there are better alternatives. Indeed, it explicitly states that the “preference and recommendation is that Congress enact comprehensive housing finance reform legislation.” But the report also states that the conservatorships, which are more than a decade old, have gone on for too long. So the report throws down a gauntlet to Congress that if it does not take action, the administration will begin the formal process of implementing the next best solution.

Fintech and Mortgage Lending

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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.