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Trump, Divorce, Property Values and $400,000,000
Feb 21, 2024
Executive Summary
The $400,000,000 judgment against Donald Trump, et al in the New York case alleging fraud, is politically problematic, to put it mildly. But, no matter if you are delighted or dismayed by the judgment, the case is instructive for real estate valuations in divorce. A collective eye-roll spanned the entire mortgage and banking industry as Judge Engeron made the same mistake divorce court judges routinely make every day. He thought he had the power to declare value. When ignorance meets arrogance and dons a black robe, ordinary citizens lose and they lose big. The miscarriage of justice is virtually criminal. That’s where I stand.
Prove me wrong
I don’t care if you love or hate Donald Trump, No one has a serious defense for Judge Engeron's verdict and punishment in the NY trial .
But, my statement has nothing to do with my political beliefs. Engeron is a rabid liberal democrat and Trump-hater. But, I know “conservative Republican” judges who are just as idiotic and wrong-headed on the issue of property valuations as anyone.
The NY verdict on Trump is symptomatic of this widespread arrogance and ignorance about property valuation and mortgage lending. It’s almost as if judges and prosecutors have to take a test to assure they are insanely ignorant about property valuation before they are allowed to ascend the bench or occupy the seat of the prosecutor.
No, I’m not going to make the arguments that political pundits have been making from both ends of the political spectrum. I have my own opinion and I’m sure you have yours. You should if you’re paying attention.
But, one thing is deliriously insane – that a judge can determine value. I should also mention that, during the trial that hinged on Trump’s valuation of his own Mara Lago property at $18,000,000, the court never availed itself of an actual appraisal so as to ascertain a reasonable opinion of value.
And, by the way, everyone in my industry knows that an appraisal is AN OPINION OF VALUE. Yes, even an appraisal performed by a professional, licensed appraiser having completed 2,500 hours of training before being licensed, is an OPINION of value.
Value is an OPINION.
Now, the question is, whose opinion is reliable and credible?
Pivot now to divorce and negotiations about buy-outs for spouse’s interest in marital residences and other properties.
A fair and equitable buy-out is predicated – NOT on equity – but on accessible equity.
And accessible equity is predicated upon value.
It goes like this
(MARKET) VALUE > ACCESSIBLE EQUITY > BUY-OUT
I don’t really consider it a problem that there is no legally defined way of specifying equity. Legal in the sense of laws, statutes, codes, regulations. [Personally, I don’t consider such declarations from the bench as anything but legally confusing and very often seriously unworkable.]
For all practical purposes, the law has avoided statutory or constitutional definitions of equity. The reason is quite simple.
Equity is determined partly by value first. And, the ONLY person or entity that sets value is that person or entity that is purchasing the thing of value (or lending for the same) with their own money. And, once that transaction transpires, value is established. But, any change to that value must wait for the next transaction. People may say “he got that house for $100,000 under value.” In reality, the purchase was a declaration of its new value.
Here's how that works out in real estate and mortgage financing.
My question to you: What is the max dollar amount the borrower can get based on the 80% limit, keeping in mind that the borrower has good reason to believe that the property VALUE is $200,000?
Most believe the amount is $200,000 X 80% = $160,000.
And, they would be correct. *But, ONLY AFTER A YEAR HAS PASSED FROM THE PURCHASE TRANSACTION. It’s called a “seasoning requirement.” The property has to “season” so as to prove, among other things, not to be an oddity in the surrounding valuation models (comparable sales).
And, until that one year has passed, the VALUE in “Loan-To-VALUE” is the acquisition price, not the market appraised value.
This strongly reinforces the fact that value is determined by the purchasers using their own money. The purchaser set the value when he paid a particular amount for the property and the seller agreed to the price.
The point is – non-coerced financial transactions set value, NOT JUDGES.
And judges who think that they can set value err greatly, an error which can be cured in about 2 hours by attending my CLE-accredited course on Property Valuation in Divorce.
Back to Trump, Divorce and Property Values.
The eye-roll moment that strained credulity off its hinges came when the prosecutor and judge did not understand that the lender – NOT THE BORROWER – determines the value of any property under consideration in a loan application. Judges, prosecutors, juries, the Supreme Court - none of them get to do that.
Not only that but the borrower/applicant is asked to insert a dollar amount figure for what they think the value of a property is. This is done with real properties, vehicles, jewelry, and many other assets. It’s called an “estimated value” and it has NO bearing at all upon the lender’s decision to lend money. None.
But, if that property is critical to the loan (as a subject property would be or as any property upon which a lender might rely as sufficient for capitalization or reserves in case it needs to be liquidated to service the debt), then the lender must make its own determination of value.
In residential mortgage lending, that means the lender must order its own appraisal in a process that is prescribed very precisely by federal law. The lender cannot order directly from an appraisal but must order through a firewall known as an Appraisal Management Company (AMC). There can be no communication between the lender and the appraiser about the property (other than clerical clarifications) and even then, information usually passes through this firewall, the AMC.
In the Trump case, the court had no actual market data upon which to base its claim of ANY VALUE – higher or lower than what Trump had claimed. And, the judge lacked the competence to state a credible opinion of value even if he had availed himself to such data. I'm not insulting Engeron here - I'll do that nearly everywhere else. But, I don't have the competence to do that either.
So, lawyers, next time you see a judge assuming a value based on ANYTHING OTHER THAN a recent appraisal ordered by the lender, please challenge the judge’s bona fides or legal grounds for declaring value.
BETTER YET, the best way to handle it for your clients’ benefit is to have your client obtain complete financing approval including a market value appraisal. And, have it before mediation if at all possible. It’s not as hard as you may think.
It’s really as simple as telling your client – FIRST THING – call Noel Cookman at The Mortgage Institute – 972-724-2881 or email Noel directly at [email protected].
That way, you don’t jump through the hoops – we do. And, you take a report to mediation or use it in offer/counter-offer negotiations.
By the way, this will save your clients thousands of dollars spent on useless, unusable appraisals. Remember, ONLY the lender can order the appraisal. That means they cannot even LOOK at the one or ones that are ordered directly from an appraiser in your case.
Non-lawyer folks who are divorcing, it’s just as simple for you – you call the same number or email to the same address. But, get going on it NOW. It’s the only way to protect your home and its equity.
Please trust me. The appraisal rule is unbending. If you don’t take advantage of our early approval process, everyone runs the risk of unfinanceable buy-out agreements and great difficulties not to mention unfair buy-outs based on bogus value assumptions.
Thanks for reading.
Noel Cookman
*There are exceptions to the one-year seasoning rule but they are considered out-of-the-box, and not part of standard mortgage financing rules.
Janet, thanks so much for your thoughts and comment. [I'm still deleting the remainder of 100,000+ spam comments that built up over the past few years. What can I say - I'm not so tech-savvy. Ha.]
Commercial financing DOES work differently in some respects than Residential Mortgage financing. Residential, 1-4 unit properties are the focus of nearly all of the federal laws and regulations pertaining to the general world of mortgages.
However, commercial mortgage financing (lending money on real property) is - thus - much LESS regulated than residential mortgage financing. This means that banks bear even MORE of the responsibility for determining the value of their collateral. And, if the bank does not make a determination of value, it is effectively testifying that the valuation is inconsequential to their lending or that they accept whatever amount is stated on the application.
From the remarks of commercial enterprisers (like Kevin O'Leary), it seems that when it comes to property values in financing, the principles are the same: an applicant enters a placeholder number on an application which the applicant THINKS is the value but doesn't really know and which statement is of ZERO importance. In fact, there are two fields in residential mortgage financing related to the subject property value - one is "estimated value" the other is "value." The "value" field is filled in by our processors or loan officers, but it adjusted/edited after the appraisal is returned, reviewed by underwriting and "accepted" by the underwriter. That last part is VERY SIGNIFICANT. It means that ONLY the lender (via their "eyes" - i.e., the appraiser) states the value. ONLY THE LENDER.
It is a fact that an applicant's statement of value is of ZERO actual consequence. Yet, the applicant must state their estimation of value.
I can only tell you that if every applicant for residential or commercial mortgage loans were held to the same standard as was Trump, MULIIPLE MILLIONS OF AMERICANS would be fined massive amounts of money, their estates would stand at risk of being devastated and virtually every one of those applicants would be criminalized overnight. And, this would happen to A+ borrowers whose credit and mortgage repayment history was perfect; and, against whom no lender would have a complaint.
Others have made the point that no person or company was defrauded. I think that the point is understated because "fraud" is well defined in finance law and mortgage law. In Texas, it carries a penalty of up to $100,000 and many years in prison. The AG's retort to that point was weak and inapplicable - that some ethereal realm of public trust was defrauded because of Trump's statement of value. These imagined offenses have no basis in evidence, the most powerful proof of this statement being the state of mortgage homes in the USA - nearly all of them are in repayment, the ones that are not are due to loss of income and not some fraud committed on the loan application. The government did not show any fraud against it or the banks. That's why no one can account for the amount of the fine - it was not calculated by any metric of defrauding. It was literally pulled out of Engeron's butt. (In Texas, we say "ass" but I'm trying to be polite. Ha.).
To "beat a dead horse" (apologies...:)) the applicant's statement of value is of ZERO consequence in any request for credit. There is NEVER and expectation by the lender that the applicant will get it right. To illustrate - on the back of this "dead horse" - EVEN if an applicant hires and appraiser to perform an appraisal and the homeowner enters the appraiser's opinion of value on their application the very day the appraisal is delivered, that applicant (through their loan officer) CANNOT submit that appraisal as verification of value. The lender CANNOT EVEN VIEW the applicant's appraisal. The lender has to order its own.
Thanks again for commenting. I welcome this and other thoughts from your mind. If you are in Texas, Florida or California (and even New Mexico, Oklahoma, North Carolina), it is just a matter of timing and I will be in your area. If it's Texas, I am constantly traveling about the state. What I'm trying to say is - I would consider it an honor to treat you to lunch...if I can "pick your brain" and learn from you. I can also provide you and your firm or practice group or local BAR Association with unique CLE accredited presentations. Appreciate you.