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.

Protecting Seniors’ Home Equity

photo by Ethan Prater

The Consumer Financial Protection Bureau has issued and Advisory and Report for Financial Institutions on Preventing Elder Financial Abuse. The Report defines elder financial exploitation as

the illegal or improper use of an older person’s funds, property or assets. Studies suggest that financial exploitation is the most common form of elder abuse and yet only a small fraction of incidents are reported. Estimates of annual losses range from $2.9 billion to $36.48 billion. Perpetrators who target older consumers include, among others, family members, caregivers, scam artists, financial advisers, home repair contractors, and fiduciaries (such as agents under power of attorney and guardians of property).

Older people are attractive targets because they may have accumulated assets or equity in their homes and usually have a regular source of income such as Social Security or a pension. In 2011, the net worth of households headed by a consumer age 65 and older was approximately $17.2 trillion, and the median net worth was $170,500. These consumers may be especially vulnerable due to isolation, cognitive decline, physical disability, health problems, and/or the recent loss of a partner, family member, or friend.

Cognitive impairment is a key factor in why older adults are targeted and why perpetrators succeed in victimizing them. Even mild cognitive impairment (MCI) can significantly impact the capacity of older people to manage their finances and to judge whether something is a scam or a fraud. Mild cognitive impairment is an intermediate stage between the expected cognitive decline of normal aging and the more serious decline of dementia. Studies indicate that 22 percent of Americans over age 70 have MCI and about one third of Americans age 85 and over have Alzheimer’s disease. (8-9, footnotes omitted)

The CFPB recommends that financial institutions consider

  • training staff to recognize abuse;
  • using fraud detection technologies;
  • offering age-friendly services; and
  • reporting suspicious activities to authorities.

These recommendations are a step in the right direction, although they offer no panacea. As the Report acknowledges, even if financial institutions report suspicious activities to government authorities, there is no guarantee that they will be acted on. But if these recommendations are publicized, they may deter some predators who think that they can act freely within the fog of their victims’ cognitive decline. And a few well-publicized prosecutions of relatives, caregivers and advisors who violate the trust that was placed in them would help to spread the message that ripping off senior citizens is no easy path to riches.

Failure to Refinance

photo by GotCredit

Benjamin Keys, Devin Pope and Jaren Pope have recently had their Failure to Refinance paper accepted in the Journal of Financial Economics.  A version of the paper can be found on SSRN. This academic paper has a lot of relevance to many a homeowner. The abstract reads,

Households that fail to refinance their mortgage when interest rates decline can lose out on substantial savings. Based on a large random sample of outstanding U.S. mortgages in December of 2010, we estimate that approximately 20% of households for whom refinancing would be optimal and who appeared unconstrained to do so, had not taken advantage of the lower rates. We estimate the present-discounted cost to the median household who fails to refinance to be approximately $11,500, making this a particularly large consumer financial mistake. To shed light on possible mechanisms and corroborate our main findings, we also provide results from a mail campaign targeted at a sample of homeowners that could benefit from refinancing.

 The authors conclude,

Our results suggest the presence of information barriers regarding the potential benefits and costs of refinancing. Expanding and developing partnerships with certified housing counseling agencies to offer more targeted and in-depth workshops and counseling surrounding the refinancing decision is a potential direction for policy to alleviate these barriers for the population most in need of financial education.

In addition, the magnitude of the financial mistakes that households make suggest that psychological factors such as procrastination, trust, and the inability to understand complex decisions are likely barriers to refinancing. One policy that has been suggested to overcome the need for active household participation would require mortgages to have fixed interest rates that adjust downward automatically when rates decline To the extent that it is undesirable to reward only those households that are able to overcome the computational and behavioral barriers of the refinance process, policies such as an automatically-refinancing mortgage may be beneficial. Although an automatically-refinancing mortgage contract would be more expensive up-front for all borrowers in equilibrium, it would remove the cross-subsidization in the current mortgage finance system, where savvier homeowners who use their refinancing option when rates decline are subsidized by those households who fail to do so. (20, citation omitted)

I have heard a number of proposals that call for automatically refinancing mortgages. Such a mortgage product would shake up the mortgage market in its current form and require a transition period to figure out how it should be priced. But the net result would certainly benefit homeowners in the aggregate.

Monday’s Adjudication Roundup

Wednesday’s Academic Roundup

Monday’s Adjudication Roundup

  • HSBC facing suit for breaching its duties as trustee for 271 residential mortgage-backed securities trusts.
  • The US Supreme Court considered whether debtors should have an absolute right to appeal denial of proposed bankruptcy plan after three circuit courts have found that debtors can automatically can appeal, while in other jurisdictions, the bankruptcy judge must permit the appeal.
  • BNP Paribas Mortgage Corp. suit from 2009 regarding Bank of America’s mishandling of hundreds of millions of dollars of mortgage-backed notes issued by Taylor Bean & Whitaker Mortgage Corp. finally settles.

Reiss on Investing In Real Estate Versus REITs

Investopedia quoted me in Investing In Real Estate Versus REITs. It reads in part,

The U.S. real estate market is finally starting to fire on most, if not all, cylinders, with investors’ enthusiasm gathering steam seemingly each passing month.

According to a study from the Urban Land Institute and PwC,expectations on profitability from the U.S. real estate sector are on the upside going forward. “In 2010, only 18% of respondents felt the prospects for profitability were at a good or better level,” the ULI reports. “This has improved steadily each year, with 68% of respondents now feeling that profitability will be at least good in 2014.”

The study reports that myriad investment demographics are pouring into the market, including foreign investors, institutional investors and private equity funds, as well as leveraged debt from insurance companies, mezzanine lenders, and issuers of commercial mortgage-backed securities.

“The anticipated interest in secondary markets is indicative of how the U.S. real estate recovery is expanding beyond the traditional investment hubs,” says Patrick L. Phillips, chief executive officer at the ULI. “Access to greater amounts of both debt and equity financing, combined with a sustained improvement in the underlying economic fundamentals, means that the opportunities and returns offered in smaller markets are potentially very appealing.”

A burgeoning profit avenue for investors is the real estate investment trust market, a market that is truly growing by leaps and bounds. Ernst & Young reports the REIT (Real Estate Investment Trust) market has grown from $300 billion in 2003 to $1 trillion by 2013, with growth expected to accelerate going forward.

By definition, an REIT is a corporation, trust or association that owns and, in most cases, operates income-producing real estate and/or real estate-related assets. Modeled after mutual funds, REITs pool the capital of numerous investors. This allows individual investors to earn a share of the income produced through commercial real estate ownership, without having to go out and buy or finance property or assets.

REITs differ from traditional real estate investing, primarily due to the fund-heavy strategic asset flow from REITs, versus the traditional free, more direct access flow from real estate investing (like becoming a landlord or buying stocks from homebuilding companies.) But both investments offer distinct advantages

*    *     *

some industry experts say the advantages of both investment classes cut much deeper than the descriptions above.

One big difference is that the market for REIT shares is much closer to the efficient market described by Nobel Prize winner Eugene Fama than the market for individual real estate parcels is, says David Reiss, a professor of law at Brooklyn Law School, and an expert on REITs.

“That means that the price of a REIT’s shares is more likely to contain all available information about the REIT,” he says.

“Because individual real estate parcels are sold in much smaller markets and because the cost of due diligence on a single property is not as cost-effective as it is on REIT shares, an investor has a better opportunity, at least in theory, to get a better return on his or her investment if he or she does the diligence him or herself.”