A Guggenheim Executive's Radical Plan to Build Millions of New Homes

According to numerous estimates, the US is massively short of housing. Zillow, for instance, says America needs to build 4.5 million new homes to climb out of this deficit. But right now we're not coming anywhere near to closing that gap. And in fact, the efforts by the Federal Reserve to tame inflation have likely made things worse, with higher interest rates slowing the construction of multi-family dwellings. So is there a way to create more homes, even in a time of high rates? In this episode, we speak with Jim Millstein, co-chair of Guggenheim Securities and a former Treasury Department official who managed the restructuring of AIG after the 2008 financial crisis. Millstein has drawn up a plan whereby Fannie Mae and Freddy Mac can enter the market for construction finance and re-start it. He walks us through how — with their existing legal authority — these two entities could make hundreds of thousands of new affordable homes come to the market each year.

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.

Speaker 2 (00:19):
Hello and welcome to another episode of the Odd Lots podcast.

Speaker 1 (00:22):
I'm Joe Wisenthal and I'm Tracy Alloway.

Speaker 2 (00:25):
So, Tracy, something that we've touched on a few times
is this sort of I guess I would say perverse
situation by which you know, the FED is raising interest
rates in an attempt to get inflation back to target,
and you know, it seems like they're kind of having
some success there and maybe we might begin a cutting cycle.
But in the process of raising raids, you constrain supply

(00:49):
of housing in particular, which is a you know, a
big affordability crisis, one of the big long term upward
sources of pressure on prices.

Speaker 3 (00:57):
Right, So higher rents and house prices are part of
the higher inflation story. And one way of dealing with
higher prices is to build out supply, right. But if
you're raising rates to offset inflation, then building out that
supply becomes more expensive and there's more uncertainty and people
don't necessarily want to do it. And then just to

(01:19):
add to that against that whole backdrop of inflation, I
think it's funny how fast this kind of faded into
the background, but we still had that mini banking drama
crisis or whatever you want to call it from last year,
which did kick off some credit tightening, particularly in commercial
real estate, and commercial real estate, as we've mentioned a
number of times on the podcast, includes multifamily residential.

Speaker 2 (01:43):
Right, So there's all this stress, and you know, in
the short term, it seems like rate hikes have probably
had some effect on cooling the economy, but there are
long term costs associated with that. Everybody is aware of this,
and it does seem to be according to many economists,
the sort of deep structural housing shortage and the effort

(02:04):
to fight inflation constraints that. So the question is, like,
is there some solution here or do we just have
to accept that this is the reality?

Speaker 3 (02:12):
Yeah, I guess the big question is how do you
get people to build more?

Speaker 4 (02:16):
Yeah? Right?

Speaker 3 (02:16):
Especially yes, yes, especially at a time when like there
are incentives out there that seem to be working against
doing that. So you have the higher interest rates, so
maybe now is not the time when you want to
spend a bunch of capital to build something new. Maybe
you want to wait for interest rates to go down.
And then also, this is a controversial statement, but I

(02:37):
saw you tweeting about it earlier today, Joe. But like
I do wonder, you know, if you're a property development
and you're building luxury apartments and there's all this question
about like population density and zoning and things like that,
maybe part of the incentive is you don't want to
build that much because you could make money just by

(02:59):
you know, constraining the supply and seeing prices go up.

Speaker 2 (03:01):
That's right, and there's certainly like you know, the way
people talk about it is that if you're a developer
and you own land, you have a real option and
you don't have to build the moment you acquire the land,
and you can wait until a stronger conditions. So it's
actually like getting the policy mix right.

Speaker 1 (03:18):
You know.

Speaker 2 (03:19):
People focus on zoning, and I'm sure that's an aspect,
and then the housing supply chain and labor and all
this stuff. It's a multifaceted challenge to do it. But
you know, we need some ideas here about how we're
actually going to produce more housing units in this country.

Speaker 3 (03:35):
Yes, and you mentioned multifaceted. We have the perfect guests
to talk about this very multifaceted and nuanced issue of
how do you build more multifamily in the US.

Speaker 2 (03:46):
That's right. We have truly the perfect guest, because he
might even I think he's even going to give us
a solution, or at least a partial solution to this challenge.
We're going to be speaking with Jim Milstein. He is
the co chair currently of Guggenheim Securities. Previously, he was
the Chief Restructuring Officer at the Treasury from two thousand
and nine through twenty eleven. So I was dealing with

(04:07):
a lot of aig stuff at the time, right in
the wake or in the sort of immediate time of
the Great Financial Crisis. Previously to that, he was at Lazard.
He's also done work on Fanny and Freddy or attempted
to look into the challenge of restructuring these big housing
banks that we have in this country, and maybe he

(04:27):
can shed some light on possible situations to at least
alleviate some of the financing strains of the housing problem. So, Jim,
thank you so much for coming on odd Lots.

Speaker 4 (04:38):
Well, thanks for having me.

Speaker 2 (04:39):
Why do you give us the sort of you went
to Treasury and Tim Geitner called you up and said,
come help us fix this gigantic mess that we have.
Why do we start there? What did you do when
you're at Treasure.

Speaker 4 (04:51):
I came in right at the beginning of the new administration,
and you know, we were in the middle. The financial
crisis was in full blue. Yeah, at that point right started.
Really the seeds were planted in two thousand and seven
and six from the whole subprime mortgage crisis and where
all of that credit risk resided in various banks and
other financial institutions, including AIG. And so I was asked

(05:17):
to get my hands around AIG first and foremost we
had put by the.

Speaker 3 (05:23):
Wait, can I just ask? I always wondered this, but like,
how does the ask? What form does the ask? Actually
just get a phone call one day and it's like,
can you sort out what was it? Billions, if not
trillions worth of AIG monoline insurance?

Speaker 4 (05:37):
Yeah, I mean desically, there was a meeting in the
Secretary's office with the team that he had assembled, a
bunch of you know, financial experts that he had brought in.
There were some longtime Treasury officials, but mostly a bunch
of outsiders came in and he built himself a little
investment bank inside the Treasury Department to deal with all
of these institutions that were, you know, that were wobbling.

(06:00):
And so by the time I got there, the federal government,
between the FED and the Treasury Department's Start program, had
put one hundred and thirty billion dollars into AIG and
most of that was to shore up the capital of
the various insurance companies, but the bulk of it and
the immediate need went to AIGFP, which had written a
series of credit default insurance swaps and had relied on

(06:24):
AIG's credit rating, which had been double A, as a
substitute for cash collateral on those trades. And when the
rating agencies, in their infinite wisdom, downgraded AIG credit rating
from double A to single A, it required a massive
cash collateralization in order to keep those trades in place.
So within six weeks, AIG was into the FED for

(06:50):
about one hundred billion dollars and all of that went
right into AIGFB to cash collateralize their trades, so they
didn't default on Goldman Sacks, on SoC Gen, on BNP,
on Bank of America, on the various insurance they had
written in their favor, on various structured finance products. And

(07:10):
it was a black hole. And one of the real
problems with AIG was that it was not regulated by
the Fed, by the Treasury Department, by anyone at the federal.

Speaker 2 (07:21):
Level of insurance is like fifty state regulators.

Speaker 4 (07:24):
And AIG was expert at regulatory arbitrage. So there was
a insurance regulator I think it was either in Delaware
or Maryland that was the primary regulator of this worldwide.
The largest insurance company in the world, it was also
the largest aircraft leasing company in the world, one of
the largest consumer finance companies in the world, and one

(07:45):
of the largest participants in the credit default insurance market.
So how do you end up getting settled with AIG?
So he called into his office the team and said
somebody's got to take charge of it, and basically everybody
else in the room took a giant step back.

Speaker 3 (08:05):
That left me into the hedge exact style.

Speaker 4 (08:08):
Oh thank you, Jim for volunteering. So I spent a
ton of time up at Wilton, which is where AGFP
was located, talking to the guys who ran the twenty
two desks, which were twenty two different trades that they
had put on. And I got to tell you, I
think of myself as a I was worked as a
lawyer for eighteen years and then as a banker for

(08:30):
ten years before this, and I think of myself as
a reasonably smart guy who can figure things out. It
took me two weeks to really just understand what they
had done and what they were doing, and to whom
they owed their insurance and the impacts then what we
call the interconnectedness and potential contagion effects of their failing

(08:52):
to make good on their insurance.

Speaker 3 (08:54):
I realized, we're supposed to talk about building additional housing supply.

Speaker 4 (08:58):
We'll get there. We'll get there.

Speaker 3 (09:00):
I have so many questions just about this particular period
of time, But when you say it took two weeks
to figure out just what was going on and what
the network of who owed what to whom actually looked like.
What was the system like back then? Was it just
like actual hard copy contracts or was there an Excel
spreadsheet somewhere retangle it?

Speaker 4 (09:22):
They were reasonably sophisticated in terms of their digitization of
their records. But the truth is is that you know
these were bespoke trades, and so without probing each of
the managers of each of the desks on you know
how it came to be that you had, you know,
six hundred billion dollars worth of exposure on internal securitizations

(09:46):
that European banks had done on their credit portfolios, where
AIG what do they call this the capital structure arbitrage desk,
where banks would basically create an internal securitization, create a
senior and subordinated trnch in their loan books, and AIG
would write credit insurance credit to fault protection against the

(10:10):
senior trench and thereby transform a book that would otherwise
have had a credit rating of overall on average double
B and turn the senior tranch into double A, which
was where their credit rating was at the time AIG's
credit rating was at the time, with the result that
the bank's capital charges on that loan book would be reduced. Yeah. Right,

(10:31):
And AIG was paid handsomely for the privilege of helping
the banks do this, and mostly it was European banks.

Speaker 3 (10:39):
So this reminds me of something else that I want
to ask you, But the decision to recapitalize AIGs so
it could make good on some of these guarantees, and
maybe this will be relevant to our conversation later about housing.
But how much discussion was there at the time about
moral hazard because I do remember the headlines about how

(11:00):
bailing out AIG was in effect a bailout of big banks,
including there was a big controversy at the time about
Goldman Sachs and how much it benefited from the AIG bailout.
But what was that aspect of the conversation, like.

Speaker 4 (11:15):
Yeah, so this let's just go back in time, Well, have.

Speaker 3 (11:19):
Our producers add in a little sound effect like do
dig so?

Speaker 4 (11:23):
On September eighth, Secretary Paulson and the newly created regulator
over Fanny and Freddy, the FAHFA, the Federal Housing Finance Authority,
which had succeeded something called the FAO, which had done
a miserable job of regulating Fanny and Freddy, put Fanny
and Freddy into conservatorship on September eight, two thousand and eight. Okay,

(11:46):
On September fifteenth, AIG's credit rating was downgraded and as
a result, the massive cash collateral call was required on
their derivatives book, cash they didn't have, and on September fifteenth,
at midnight, Lehman Brothers filed for Chapter eleven, creating really
the beginning of the widespread panic in all financial markets

(12:09):
because of the size of Lehman brother's own derivative book,
mostly the repo book right where they were both a
lender and a borrower in the short term overnight repo markets.
So that destabilized the financial system. And I think as
a result of the impact of the Lehman filing, the
New York Fed decided that to throw the largest insurance

(12:33):
company into a receivership or rehabilitation proceeding under state law,
which is where it would occur, would just creater the
financial markets and accelerate the panic that occurred with Lehman.
And so the New York Fed wrote the largest loan
and recorded human history in favor of AIG. Seventy five

(12:54):
billion dollars was extended to AIG in order to make
sure that it did not fail right then and there.

Speaker 3 (13:02):
Imagine the junior lawyer whose tasked was like getting that
loan signed by both parties.

Speaker 4 (13:07):
So AIG went through that loan within six weeks, just
drew the whole thing down. And on top of that,
the Fed then separately extended basically a broker dealer loan.
They did clateralize lending to AIG in order to give
it incremental liquidity. In October, the TARP legislation would finally passed,

(13:34):
and that gave the Treasury Department seven hundred and fifty
billion dollars of firepower to do something with. Initially, Secretary
Paulson thought, and that's what he sold Congress on, that
he was going to buy troubled assets off of bank
balance sheets in order to create liquidity for the banks.
The problem with that was the price at which you
could buy those trouble assets if you were protecting the taxpayers,

(13:54):
would reveal the deep insolvency of many of these banks
if they were forced to sell their assets at highly
discounted prices. So he very quickly changed course and decided
to recapitalize the entire industry by buying preferred stock. And
so the one hundred and thirty five billion that I
talked about the Fed being into AIG for under their

(14:17):
Emergency Lending authority under Section thirteen to three. There was
a first recapitalization of that one hundred and thirty five
billion dollars done in November and December of two thousand
and eight after TARP passed, where fifty billion dollars of
tart money was brought in to refinance out fifty billion

(14:37):
dollars of the Fed's lending to AIG. So at that point,
the FED was into AIG for call it seventy five
billion dollars of senior secured loan at the parent level,
and the Treasury Department owned fifty billion dollars worth of
preferred stock at the parent level.

Speaker 2 (15:12):
I love talking about this stuff because you know, this
is like where we start our career, so this is like,
you know, it could go on this forever, but AIG
did get cleaned up.

Speaker 4 (15:20):
It's fun.

Speaker 2 (15:20):
I always get a kick out of looking at the
stock of AIG because if you just look at like
a ten year chart, it looks like a normal thing,
you know, like a normal stock price because it's still trades,
but like on a split adjusted basis, So it's like
a seventy six dollars stock right now, but because of
the just gigantic dilution and the split, it was like
a fourteen hundred dollars stock equivalent back then. So it's

(15:43):
just you know, it was saved, but the equity was
truly a visceery.

Speaker 4 (15:46):
Yeah, so I'll just take you to the end of
that stock. Okay, in order to pay back the FED
Yeah and pay back the Treasury, we had to downsize
and de risk the company. So we did a series
of asset sales over eighteen months. We sold off one
of the largest consumer finance companies in the United States.
We sold off the aircraft leasing business. We sold the

(16:07):
Asian life insurance businesses. They were the largest life insurance
provider in Asia, including China.

Speaker 2 (16:14):
They had one of the only really founded in China right.

Speaker 4 (16:17):
Well, they founded, but they had one of the first
licenses and only persisting licenses to provide insurance by a
foreign entity in China. We sold off the Middle East
Life insurance operations. We sold off the European life insurance operations,
and then having generated all of those asset sale proceeds,

(16:38):
had could pay off the FED Alan and that left
the Churchury preferred stock in place, and we then had
to do a complete recapitalization, and as you noted, we
converted the preferred into ninety two percent of the fully
deluded common equity, diluting the existing common down from one
hundred percent ownership to eight percent. And over the next

(17:01):
two years and twenty twelve twenty thirteen, the Teratury Department
sold off that ninety two percent of the common equity.
The net result of that was all in between interest
dividends and asset sale proceeds and stock sale proceeds. The
Government of the United States made twenty two billion dollars
on its one hundred and fifty billion dollar investment in EIG.

Speaker 2 (17:24):
So AIG was just one of there were many troubled
institutions that floated to the surface of that time all
of their troubles. AIG was a huge one, and there
were those ones that went bankrupt, and then there was
also Fanny and Freddy, which still exists and which still
also have some sort of weird equity that I don't understand.

(17:45):
And there was for the last fifteen or so years.
There's always talking about reform, and you know, there's all
these lawsuits and stuff like that. So Geitner asked you
to try to figure out something with Fan what happened
with that after so AIG cleaned it up, and yeah,
solved that, I guess.

Speaker 4 (18:00):
Yeah, And by you know, the time we got the
AIG recapitalization agreed and consummated in January of twenty eleven. Yeah,
all that needed left to be done on that was
to sell the stock we had converted the pervert into
and you know, any monkey could do that. They didn't
need me for that. So I went into the secretary
and suggested that it was time for me to leave,

(18:22):
having done what I came to do and was asked
to do. And I had worked on a bunch of
other things along the way. They've sort of all hands
on deck kind of situation for the first two years. Sure,
And he said, well, you know what about Fanny and Freddy?
And I said, what about it? And he said, well,
why did you take a look?

Speaker 3 (18:39):
Why don't you solve another one of our Thornias financial problems.

Speaker 4 (18:43):
Yeah, and there had been an ongoing interagency study group
to try to figure out what to do with them,
And so I looked at their twenty five volumes of
work product and then came back with something not dissimilar
to that which we had done with AIG. So at
that time, just to sort of situate this, by twenty eleven,
between Fanny and Freddy, the Treasury Department had purchased one

(19:07):
hundred and ninety two billion dollars worth of preferred stock
in the two of them, sort of one hundred and
twenty and Fanny and seventy and Freddy. But so maybe
it's important to the full story here is to understand
how that rescue occurred, similar to the way the TAR
program was ultimately deployed, where they purchase a preferred stock

(19:30):
in effect, and if you think of what the purchase
of preferred stock does for third party investors in large
financial institutions, it's basically the government of the United States
saying your entire liability structure, you J. P. Morgan, you,
Fanny and Freddy, you b of A, you're good. Anybody
who has a debt claim or a contract claim against

(19:50):
a large financial institution that has a significant preferred stock
investment from the federal government. The federal government is basically saying,
you guys are money good because we're junior to you
in the capital structure.

Speaker 3 (20:03):
This was back in the time when there was still
debate about whether or not Fannie May and Freddie Mack
their guarantees were the same as a government guarantee.

Speaker 4 (20:11):
Yeah. So, so yeah, we'll step back even further.

Speaker 2 (20:15):
So we're doing this episode in reverse, getting further and
further back away from the time.

Speaker 4 (20:20):
Yeah, so Fanny and Freddie are so called government chartered.
They have charters that derive from the Congress of the
United States Financial Institutions, unlike JP Morgan, which is organized
under state law I think in Delaware or maybe New York,
because it's like an amalgamation of a series of New
York banks and regulated by the FED and the FDIC

(20:41):
who provides insurance to them. Fanny and Freddy were chartered
by the federal government. Fanny actually derives back from the
Great Depression. They were the first troubled asset purchase program.
They were organized to purchase defaulted debt mortgage loans off
the balance sheets of failing banks in the nineteen thirties,

(21:02):
and when they purchased them, they then restructured them. They
actually created the first long term mortgages in the United States.
Most mortgages were of five year storation back in the
nineteen thirties, and once purchased by Fanny, the way they
worked out those troubled loans was to extend the maturities
out first ten then eventually fifteen years in order to

(21:23):
give the barers time to get through the depression and
actually get current on their loans. So Fanny was then privatized.
It was government owned corporation throughout the thirties, forties, fifties, sixties,
and as the United States entered the Great Society Programs
and the Vietnam War and the deficits started to blow out.

(21:46):
With Fanny having all of that mortgage debt on the
balance sheet of the United States, they needed to get
it off balance sheet, so it was privatized, I think
in nineteen sixty eight, so its debts were no longer
consolidated with the debts of the United States federal government.
And then Freddy was formed in nineteen seventy because the

(22:09):
savings and loan industry thought, you know, they needed access
to the securitization market, just as the big banks who
were basically the customers of Vennie May. So you had
now two entities in effect buying mortgages, creating a secondary
market for mortgage credit that banks originated. So JP Morgan

(22:31):
would originate alone. As long as it met Fanny or
Freddy's criteria that the loan was at least had twenty
percent equity, that it didn't exceed a certain principal amount,
JPM could sell it to Fanny or Freddy. So they
were secondary market purchasers and ultimately in the nineteen eighties

(22:52):
when the securitization market was first developed, and that there
was a lot I was actually a lawyer at a
law firm that pioneered the securitisation market at that time.
There are a lot of legal issues that had to
be solved to create a trust into which mortgages could
be dumped and securities issued against the cash flows of

(23:13):
that pool of mortgages, and that market really was pioneered
and developed in the nineteen eighties. Then Fanny and Freddy,
as the owner of large amounts of mortgages, thereby could
create liquidity for themselves by selling mortgage securities mortgage backed
securities mbs and actually are mbs residential mortgage backed securities

(23:39):
to institutional investors and thereby do it all over again
provide incremental liquidity to the banking industry for the mortgages
they were originating.

Speaker 3 (23:50):
Just to be clear, those bonds came with a guarantee
from Fanny and Freddy that they guaranteed principal and interest payments.

Speaker 4 (24:00):
Of principle and interest on those bonds, okay.

Speaker 3 (24:03):
And there was a debate pre two thousand and eight
about whether or not that guarantee was like effectively the
same as the US government guarantee those bonds.

Speaker 4 (24:11):
So how did the market infer that it was as
good as treasuries that the bonds guaranteed by Fanny and Freddie.
So there were two essential elements of the quote implied guarantee.
One was they were federally chartered. Right, they were originally
instruments of the United States government, agencies of the United
States government federally charted, so in a sense they were

(24:32):
children of the federal government, even though they were privatized
and owned by you know, private equity investors. Because they
were federally chartered, the bond market thought, well, the government
of the United States, you know, has ownership of these
one way or another. Separately, in their charters, they had
authorization to borrow two and a half billion dollars from

(24:54):
the Treasury Department in a pinch. Now, just to size
that up a little bit. By the time I'm of
the financial crisis, Fanny had probably three trillion dollars of
outstanding mortgage security guarantees and Freddie probably two trillion of outstanding,
So each of them could borrow for their liquidity needs

(25:16):
two and a half billion dollars from the federal government.
So that was a drop in the bucket in terms
of what their liquidity needs might be compared to the
outstanding liabilities they had. But nonetheless, investors believe that that
meant between the Federal Charter and the right to borrow
from the Treasury Department two and a half billion dollars,

(25:37):
that somehow there was a guarantee by the federal government
of these securities.

Speaker 2 (25:40):
This is so useful because I've always sort of known this, like, oh,
there was an implied guarantee, but I didn't actually know
that there were two specific underpinnings of where this implication
came from.

Speaker 4 (25:52):
That's where it came from.

Speaker 2 (25:53):
So then it actually has some sort of real bank.

Speaker 4 (25:55):
So we're now in two thousand and eight. In the
summer of two thousand and eight, the Congress in the
United States passed the Housing and Economic Recovery Act of
two thousand and eight, which was basically a complete redo
of the regulatory arrangements around Fanny and Freddy. A new
regulator was created, the Federal Housing Finance Authority, that succeeded
the former regulator, which had proven to be weak, and

(26:18):
its authorities were buttressed it was given authority to place
Fanny and Freddie into receivership or into conservatorship, receivership being
a liquidation preceding conservatorship being a conservatorship to conserve its
operations and assets, and the Treasury Department, under HERA and
the Housing and Economic Recovery Act of two thousand and eight,

(26:40):
was given authority to purchase preferred stock in order to
ensure the solveignty of Fanny and Freddy.

Speaker 2 (26:49):
So the implication became real or the yeah, that was
the moment that it was no longer ambiguous exactly.

Speaker 4 (26:54):
And when Paulson went to the Congress to ask for
this authority, he said, look, if I have a howitzer,
I won't have to use it. But shortly thereafter he
had to use it, and September eighth of two thousand
and eighty the conservatorships were created, and very quickly, by
the first quarter of two thousand and nine, the preferred

(27:18):
stock authority the Treasury had was deployed and the first
big draws on that, and ultimately by the end of
twenty ten, one hundred and ninety two billion dollars of
preferred stock had been put into the two entities. Now
the markets were covered. Right in twenty eleven, the equity

(27:39):
market took off, and you know, May of two thousand
and nine after the stress tests were announced and the
interbank market sort of recovered. By the end of two
thousand and nine, they were the banks started to trust
each other again and lend to each other overnight.

Speaker 3 (27:54):
You still didn't have private label mbs, right.

Speaker 4 (27:57):
And you still don't know that market is almost completely dead.

Speaker 3 (28:00):
I have to say my expertise in housing finance ends
in twenty fifteen when I left the FT and I
came to Bloomberg. However, as far as I can tell,
not much has changed since twenty fifteen, So the gsees
are still under conservatorship. You still don't have much private
label mbs. There used to be proposals for sorting out

(28:22):
housing finance, but I don't even see those that much anymore.

Speaker 4 (28:25):
Yeah, So let me give you the macroh because it
goes to the housing supply issues. So if you took
the aggregate market capitalization of the public equity markets in
the United States, that's about fifty trillion dollars. If you
took the aggregate value of the housing stock, the residential
housing stock in the United States is about fifty trillion dollars.

(28:49):
That's the house value. There's twelve trillion dollars of mortgage
debt outstanding against that fifty trillion dollars of house value.
And of that twelve trillion dollars, seven is on the
balance sheet of Fanny and Freddy Is guarantees of mortgage
backed securities. Those are mortgages. Seven trillion of that twelve

(29:10):
has been securitized by Fannie May and FREDDIEMAC and guaranteed
by them. Another two trillion is on the balance sheet
of another government sponsored entity called Ginny May, which is
controlled by the federal government, and it securitizes faj and
Veterans Authority Administration loans. So there's about two trillion there.

(29:34):
So when you add it up, of the twelve trillion
dollars of mortgage credit risk that is out there against
the housing stock of the United States, nine trillion is
on Fannie MAE, FREDDIEMAC, and Ginny May's balance sheets. So
the government basically is the biggest player in the mortgage
finance market. None of these entities originate mortgages. That's all

(29:55):
done by non banks and banks, but most of the
mortgage credit risks resides on the balance sheets of one
of these three entities.

Speaker 2 (30:18):
So we have to get to the present tense. Although
again you talk about this for three hours, but before
we just do because this is I think the last
step in understanding how we got to this point. Just
describe real quickly the current institutional and economic arrangement of
Fanny and Freddy. Because there is this like little stub

(30:39):
equity that trade. I think all the profits that they
may go to the government. There's all kinds of lawsuits.
But what is the form that they exist as today?

Speaker 4 (30:47):
Okay, so the good news is the two entities have
been substantially reformed during this sixteen year conservatorship. One of
the biggest problems that they faced in two thousand and
eight was that they had become a huge buyer. Not
only they have this guarantee business where they guarantee mortgage
backed securities that are securitized out to institutional investors, but

(31:07):
they also had a huge portfolio investments where they borrowed
money at basically a slight premium to treasuries, so they
could fund a portfolio very cheaply, and they went out
and bought not so much the subprime private label securities,
but they bought all day, which was the sort of

(31:28):
next step, right exactly, So they bought a lot of
all day and they made it was a huge carry trade.
They were making a huge spread on those portfolios. Their
portfolios exceeded a trillion dollars combined between the two of them,
and that's how they were juicing their earnings in two
thousand and four, five, six, and seven, as the subprime

(31:50):
securitization market was taking market share away from the prime
or conventional securitization market that they ran. So during the
course of the conservative ships, the portfolios have been wound
down to the point where they're really now just transaction
portfolios where they borrow money to buy mortgages off bank
balance sheets before they can securitize them and repay that borrowing.

(32:13):
So the portfolios are down to, you know, one hundred
and fifty billion, you know, or two hundred billion at
most between the two of them, from the trillion dollars
they were coming at the beginning of the financial crisis.
So that's a major reform that's gone on. They've also
new capital standards have been imposed by their regulator and conservator.

(32:33):
The SHFA, and they are slowly through retained earnings recapitalizing
and building capital. So today I Fannie MAE has eighty
billion dollars of capital on its balance sheet and Freddy
probably has fifty billion. But they're still from a regulatory
capital point of view, under capitalized. They need more capital

(32:55):
based on the capital rule that was created to govern
them during the concern readership. So how did they even
get to the point where they could and conservership have
that much capital as they have today in twenty twelve,
I believe it was after I was gone from the
Treasury Department. The Treasury Department changed the deal and instead

(33:17):
of a fixed dividend on that one hundred and ninety
two billion dollars worth of preferred stock, it became a
so called profit sweep, so whatever profits they made went
to the Treasury Department. And by twenty nineteen, seven years later,
after the profit sweep was instituted and over which there's
much litigation pending by existing shareholders, then existing shareholders. By

(33:42):
twenty nineteen, when the profit sweep was suspended, the Governor
of the United States received three hundred and two billion
dollars worth of dividends so they made one hundred and
ninety two billion dollar investment. The Treasury Department's already received
three hundred and two billion backs. They've made more than
one hundred billion. They've way out done my AIG profits.

(34:07):
But it was suspended. So the Secretary Manuchin, President Trump's
former President Trump's Secretary of the Treasury, determined he was
going to try to recapitalize them and actually end the conservatorship,
and towards the end of that goal, he suspended the
profit sweep so they could build capital. And these two

(34:29):
entities have become fabulously profitable. Fanny makes you know, on average,
over the last four or five years, has been making
net after tax, net after a special charge that was
created as a pay for for an offset of one
of the Trump tax cuts. After all of that special

(34:50):
assessment against their income and after tax, they're making sort
of fifteen billion dollars a year, and Freddy's making about
eight or nine bi million a year.

Speaker 2 (35:01):
Fanny the equity is worth eight billion dollars total. So
you could see why private investors would love some legal
ruling that gives them access to these profits.

Speaker 4 (35:10):
Yeah, well, let's talk. It's not that's a little misleading. Okay, sorry,
So what is the Treasury Department own It owns one
hundred and ninety two billion. It's actually more because of
the way it accretes. But they own a one hundred
and ninety two billion dollars for their one hundred and
ninety two billion dollars an investment of senior preferred stock.
Under that is about thirty two billion of junior preferred

(35:32):
stock that third party investors own.

Speaker 2 (35:35):
Okay.

Speaker 4 (35:35):
And these are most of the guys who were litigating,
funding the lawsuits against the various actions that were taken
both to start the conservatorship and during the conservativeship, like
the profit sweep, and under that is the common stock,
but the common stock that trades only represents twenty percent
of the fully deluded equity because on top of the

(35:56):
senior preferred stock, the Treasury Department has a penny warrant
that can be exercised for one penny to buy seventy
nine percent of the stock of each entity. Okay, And
this is very similar actually to the way AIG was
set up. The tart money went in as senior preferred,
but we also had a warrant entitled the Treasury Department

(36:17):
to seventy nine percent of the stock. So today the
stock that trades really represents only twenty percent of the
total captainization.

Speaker 1 (36:25):
Got it.

Speaker 4 (36:26):
But still the equity account is teeny because why is
it teeny? Because you have that huge senior preferred stock
that sits above all of the junior preferred and the
senior preferred and the common Okay.

Speaker 3 (36:39):
I'm going to resist the temptation to ask more questions
about the design of like the capital stack of some
of these things. But let's go back to the beginning
of this conversation about how do we increase housing supply
in the US. So we are already in a situation
where as you mentioned, nine of the twelve trillion I

(36:59):
think it was, mortgages outstanding in the US effectively reside
on the balance sheet of government sponsored entities. So what
more can these agencies do to support the housing market?
What more would you ask of them?

Speaker 4 (37:14):
Yes? Well, all right, so let's begin with the limitation
under which they operate. So, in order to protect the
banking industry's franchise to make mortgages, to originate mortgages, these
entities are barred from being in the primary market. They
couldn't go out and start lending to developers directly. But
just as they do in the residential mortgage market and

(37:36):
as they do in the multifamily mortgage market, they could
create a secondary market for construction loans and thereby increase
liquidity in the construction finance market. And if you look
today at the real constraints on supply as a result

(37:56):
of the inflation problems we've had over the last couple
of years, and they fed interest rate hiking, the construction
finance has become incredibly expensive. But not only. The other
impact of high interest rates is that cap rates for
once a project is completed, because the financing costs are
so much more expensive, the projects have less value to

(38:18):
the equity owners, and so that market is almost frozen.
There's been a surge of multi family constructions post pandemic,
so in cities like Austin, rents are actually starting to
come down because there were so many people moving to
Austin and like communities that multifamily developers went in before
the interest rate hikes and started projects, And the supply

(38:39):
constraints in some markets are being eased by a surge
of multifamily construction. But that's not true in all markets.
There is real supply demand and balance, and the only
way depends on who you talk to, but there's a
shortage of supply of somewhere between a million to five

(39:00):
million units is the best estimates I've seen nationwide. So
you know that on the margin, right, when supply and
demand are out of balance like that, you get the
enormous house price and rent price increases. And that's what
we've seen over the last post pandemic period. There's been
a huge surge in house prices and huge surge and

(39:21):
rents because there's just more demand than there is supply
to meet it. So going back to what these entities
could do again, I want to just take one further
step back. Sure, what does a federal government do today
to try to augment the supply of housing. Well, they
have a bunch of demand side programs, which you would
say today are counterproductive. We've got more demand than we

(39:42):
can handle. But the government subsidizes demand in a variety
of ways, in part by making cheap mortgage credit widely
available through the government sponsored entities, and through programs for veterans,
and through programs for first time home buyers and lower
middle income persons. Through the FAJA and through a rental
voucher program administered by HUD. They also on the supply

(40:07):
side provide. There's a tax credit program, the Low Income
Housing Tax Credit Program, which is subject to annual appropriations
by Congress and is one of the most incredibly cumbersome
bureaucredit processes. To get your hands on these tax credits,
they get allocated by HUD to the state finance agencies.
The state finance agencies set up programs to qualify for

(40:31):
those tax credits for new projects. But if you have
the patients and the lawyers to do the paperwork, and
you can go through the competitive bidding process, you can
get a tax credit that can basically foot the bill
of new construction. About somewhere between twenty five to fifty
percent of the cost of new construction is basically being

(40:52):
subsidized through the tax code of the United States the
sale of tax credits. So a developer can build a project,
all the tax credits to somebody who needs them, and
offload about twenty to fifty percent of the construction costs.
But that's it. That's what the federal government does today.
I think a much more efficient way would be to

(41:13):
create a new finance program somewhere in the federal government
to provide mezzanine financing. Then how could we do this
and why mezzanine financing? Right, So, if you want to
build a new apartment building, or you want to build
a house, if you put up forty percent, you as
the builder or developer, put up forty percent of the

(41:35):
construction cost. You can get a loan for sixty percent
of the construction costs from a bank, so your equity
is levered one and a half to one sixty forty.
If the government were to provide twenty percent of the
construction cost and a mezzanine financing, so you could still
get sixty percent senior debt because the mezzanine would be

(41:56):
expressly subordinated. It's the equivalent of equity from a senior
lenders born in view. But now the equity holder, the developer,
only has to put up twenty percent. It's like a
conventional mortgage. Right, you put twenty percent down, you get
an eighty percent loan. So here the government could actually
expand financing for new construction and thereby lever the equity

(42:20):
of the developer for to one rather than traditionally one
and a half to one, and if the government were
to pass on its own relatively cheap borrowing costs as
opposed to what the market would charge for mezzanine financing,
the developers and we've done this math, could build affordable housing,
you know what qualifies as affordable housing and still earn

(42:43):
the same kinds of return on equity that they earn
from market rate housing. So it would create a massive
incentive to build new supply for where it's really needed.

Speaker 2 (42:55):
Let's hear the math both in terms of why affordable
housing be comes more profitable under this, and then also
the math of like how many units we're talking about
potentially this could unlock.

Speaker 4 (43:07):
Yeah, so this is you know, private equity guys who
listen to you will understand. Gals will understand this. Right,
So if you're levering your equity four times, yeah, you
can effectively earn the same rate of return building lower
priced units.

Speaker 2 (43:23):
It makes sense.

Speaker 4 (43:23):
I mean, the math is pretty straightforward. And I tested
this out with a variety of multifamily developers directly and
just said, hey, you know, if the government had a
mezzanine financing program, could you build to eighty percent ami
average median income? What's affordable in government parlance, is someone
earning eighty percent of area median income if their rent

(43:49):
cost is only thirty percent or less of that, right, AMI,
that's affordable. And so we tested this with a series
of the large multi family developers, and you know that
they're if they could lever their equity four to one
with cheap mezzanine financing, they could build to those metrics.

(44:11):
I want to give you some more numbers, system.

Speaker 2 (44:13):
No, I love it. We're here for numbers.

Speaker 4 (44:15):
Yeah, yeah, just to impress upon you how small. The
federal government's role in housing other than through the mortgage
markets is HUD, the Housing and Urban Development Agency, which
was created in nineteen seventy four to deal with urban
renewal because the inner cities were falling down in the

(44:37):
nineteen sixties. It's total budget today for new housing, for playgrounds,
for urban renewal. Its total budgets is about four billion dollars.
The military budget, just by contrast, is eight hundred billion dollars.
So we're investing eight hundred billion dollars in our national
defense and four billion dollars in housing an urban renewal.

(45:01):
And now we are also have the tax credit program,
and the tax credit program is responsible for building about
one hundred and ten thousand new units a year, which
is big. But if we have a five million unit shortfall,
if that alone is not going to fill that shortfall,
to take you fifty years to fill that shortfall at

(45:23):
that level of subsidy, a mezzanine financing program put aside
for the moment where we would do that. Who could
do it? A mezzanine financing program, which would be basically
a revolving loan program, right, because we're talking about construction finance,
that would be taken out the way construction is done. Right,

(45:43):
get you finance the construction. As soon as the construction's done,
the buildings leased up, you get takeout financing because you
now have a stable set of cash flows from rent
payments coming in on the property. And therefore a different
set of lenders will give you longer term financing, including
Fanny and Freddy who do take out financing for new construction.
So if there were a mezzanine lending program at the

(46:04):
federal level, generally it's three to five years from permitting
to completion on a new apartment development of any size,
so that mezzanine loan would get taken out and could
go right back and do it again. It'd be a
revolving loan program. So it's a it's not a one off,
it's not a one off, and it's also not a

(46:26):
continuing hit to the federal budget. So from a deficit
point of view, this is a one time capitalization and
you've done, and now you have a program, depending on
its size, that can make a major impact on new
supply of new housing. So just to size it, if
there were one hundred billion dollars of mezzanine lending authority,

(46:50):
and so twenty billion dollars a year, because it takes
five years from permitting to construction, so we'd put out
twenty billion a year in effect in a revolving So
in year six you get the year one loan paid back.
You put it back to work in year six, so
twenty billion a year, and that twenty billion is twenty
percent of the total construction cost. So you're now facilitating

(47:13):
or turbot charging one hundred billion dollars of new construction
a year. One hundred billion dollars of new construction a
year would get you two hundred and fifty to four
hundred thousand new units a year, which means that one
to five million dollar housing shortfall unit shortfall could be
filled over the five year period.

Speaker 3 (47:34):
So just on this point, I'm sold. Okay, wait, I'm
going to ask all the Devil's advocate questions then, So
I understand the role of leverage in this. However, given
the history of two thousand and eight, I think people
here leverage in the housing market and maybe start to
get a little bit nervous. How risky are those construction

(47:55):
loans because I assume, you know, in twenty twenty three,
I think there was a drop of like forty percent
in construction financing. I assume there's a reason for that,
and it's either, you know, banks being reticent to extend
this type of credit, or maybe they're constrained by higher
capital charges around this particular issue, or maybe it's simply

(48:17):
that with the interest rate uncertainty, the numbers don't pencil out,
and so it's not that the loans themselves are inherently risky.
It's the idea that the US government could effectively hold
them through the cycle of interest rates. But can you
talk a little bit more about what risk the US
government would be taking on its balance sheet if we
were to do this.

Speaker 4 (48:36):
Yeah. So the way I look at this is, if
the standards that Fanny and Freddy now operate under for
their mortgage purchases, right, they buy mortgages from banks, Those
mortgages have to meet certain basic criteria both in terms
of the DTIs of the borrower, the debt service to

(48:57):
total income of the borrower that the mortgage represents, and
the loan to value. So Fanny and Freddy can't buy
a mortgage that has a loan to value higher than
eighty percent, Right, So you've got to put as a
new home buyer, you got to put twenty percent down
in order to get a mortgage that ultimately ends up
on Fanny and Freddy's books. Now there's some exceptions to that,

(49:21):
but ninety five percent of the mortgage credit that's on
their books is on that basis of twenty percent equity
eighty percent down. Their history over their lives on those
kinds of mortgages, in terms of credit, losses are negligible.
Obviously in the cycle, you know, in a massive downturn
like we had in two thousand and eight, you're going

(49:42):
to have you know, a higher rate of delinquency and default.

Speaker 3 (49:46):
But no, I think even in two thousand and eight, multifamily.

Speaker 4 (49:49):
Yeah, the multi family books was fine, was fine. So generally,
as long as we have a growing population, you're going
to have increased demand for housing, right, I mean, if
the population started to strengthen, the holder of a construction
loan on the other end of that five year construction
period might face a market that's very soft. But we

(50:10):
have a growing population. Even though you know, we're only
adding half a million people a year by way of birth,
We're you know, adding a couple of million people a
year by way of immigration, legal and illegal. But nonetheless
we have a growing population, and therefore you could expect
the housing market it'll have ups and downs based on

(50:32):
you know, interest rates and the like. And location. Location,
location is important for housing always. But I think with
twenty percent equity underneath the government, the risk of you know,
a mezzanine lending program are very manageable.

Speaker 3 (50:48):
Why don't banks do more construction loans?

Speaker 4 (50:51):
They do, but they do it only up to sixty percent.
There is a mezzanine market, but the mezzanine market is
expensive and liquidity constrained. And get another five percent of
your construction costs, but that's going to cost you twelve
to eighteen percent, and that's eating into the equity holder's
rates of return.

Speaker 2 (51:09):
So we already know that there are all kinds of
legal fights going on with the Fanny and Freddy already,
and you're sort of introducing a new market for them
or your idea that has never existed. So there are
sort of two things. One, you mentioned that in residential mortgages,
you know, they don't go out and extend alone. They

(51:31):
buy a loan from a bank. Yeah, and so it
sounds like that in this case. So a they're entering
a new space, or they would be entering a new
space mezzanine lending for multifamily, and it sounds like there
would be a direct interface.

Speaker 4 (51:45):
No, they're charters, those federal charters that created the implied guarantee.
Those federal charters prohibit them from so they would be entering. Okay,
so it have to be a secondary market, got it right.
But if I'm JP Morgan, Yeah, and I know I
can dump this mezzanine loan that I wrote to Fanny
May as long as it meets Fanny May's criteria. I

(52:06):
can sell it immediately to Fanny may delf Spread Dell
write that loan.

Speaker 2 (52:10):
I have to imagine there are other legal questions, and
you mentioned your lawyer, but you know you can always
get multiple opinions from multiple lawyers. So when you are
talking about these ideas, are there any concerns about is
this actually allowed?

Speaker 4 (52:26):
Yeah, so let's talk about the necessary steps. Okay, Right today,
they don't do construction lending, so the capital rule that
was developed for them during conservatorship does not address what
the capital charge for a construction loan would be, particularly
a mezzanine construction loan, So that would have to be
developed and promulgated and passed by the regulator. It'll take

(52:49):
a little time, but it's not rocket science because banks
do construction lending, and there's a bank capital rule for
construction lending that the regulator for Fanny and Freddy could
borrow from and use as a model and a precedent,
but nonetheless a capital rule would have to be created.
I think there's very little question whether Fanny could create
a secondary market and construction loans, because in fact, they

(53:11):
did some of that back in the nineteen eighties. So
there's actual precedent for them in construction loans. In the
case of Freddie, there's probably a better argument that you know,
a more conservative lawyer than me who's really being an
advocate on this, might say that Freddie might be constrained
and doing construction lending on a secondary market basis. But

(53:33):
the truth is that, you know, the Congress of the
United States recognizes it broadly. There's bipartisan recognition that we
got a housing supply problem in the United States. So
even if you don't use Fanny and Freddie's vehicles, you know,
the hardest thing in America to do today is get
a piece of legislation pass. So I'm not you know
of some wild eyed optimist about the ability to create

(53:56):
a new federal financing bank to do this. But the
problem on housing is so great, and it's so widespread
across red states and blue states and purple states alike,
rural communities and cities alike, that I actually think if
you went to the Congress and said, hey, guys, let's
start small and see if it works. Let's start fifty

(54:17):
billion and against a seven trillion dollar budget, could they
not find fifty billion dollars to augment housing supply in America.
I think they're probably could I think.

Speaker 3 (54:27):
You possibly anticipated my next question with the wild eyed
optimist comment just then, But why do we have to
make it so complicated? So there are restrictions on the
gsees doing direct flending into the mortgage market, but what
they're effectively doing is using their balance sheet and their

(54:49):
credit rating, and their association with the US government and
their subsequent cheap capital costs to subsidize these mortgages effectively.
So why not just go whole and have them extend
the finance.

Speaker 4 (55:02):
Tracy, I'm with you. I'll bring you to the next
meeting down with Dacy.

Speaker 3 (55:07):
It's just politically infeasible.

Speaker 4 (55:09):
No, no, it's not. I think it's well. First of all,
this idea is getting traction at the state level, right
the number of the state housing finance agencies are starting
to do this, recognizing the constraints on developers.

Speaker 2 (55:19):
We did an episode about the Montgomery County.

Speaker 4 (55:22):
Exactly, and the Massachusetts Housing Finance Agency is now gotten
authority from the Massachusetts legislature to do some of this
lending as well. So this is catching on. I mean, people,
this isn't you know, I didn't invent this. There are
a variety of people who have thought this mezzany lending
by state or federal agencies could help lever developer equity

(55:45):
and augment the supply or turbertize the supply of new housing.
But I think even at the federal level this is
getting some interest. The problem is we're an election season, right,
and try as we might get new initiatives passed by
an existing administration. You know, they're a little diverted on
getting re elected.

Speaker 2 (56:05):
Hey, have all this stuff going on. So, just to
be clear than on this, right, there are theoretically multiple
ways that the US government could use its borrowing authority
or its lending capacity to facilitate this. It doesn't necessarily
have to be through Fanny and Freddy. But if it
were through Fanny and Freddy, would that require legislation or

(56:26):
who so, why don't you walk us through that component?

Speaker 4 (56:28):
Yeah?

Speaker 2 (56:29):
So would have to make a decision, And how would
they go about making the decision where these existing banks,
under their existing rules now enter a new market.

Speaker 4 (56:37):
Yeah? So in conservatorship, Yeah, Fanny and Freddy are effectively
there's joint control over them by their conservator, the Federal
Housing Finance Agency for the person of the executive director
of that agency and by the Treasury Department, because the
Treasury Department has one hundred and ninety two billion dollars

(56:58):
into them and a senior preferred stock that has a
series of covenants. So both the Treasury Department and the
FHFA would have to authorize this. The FHFA would have
to create a capital rule for construction lending, and the
Treasury Department would have to consent to the use of
their borrowing capacity, their ability to create a portfolio of loans.

(57:21):
Would have to consent to them building a portfolio of
mezzanine construction loans. But the Congress has nothing to say.
I mean, they could intervene if they thought this was
a stupid idea or they wanted to do it separately
away from Fanny and Freddy. But as I said, but
they are not necessary, they are not for this. Yeah,

(57:42):
So this is so. When HERA was passed in two
thousand and eight, it created authority to create the conservatorships
and end the conservatorships. You know, the purpose of the
conservator ships was to restore the safety and soundness of
the entities, and the safety and soundness of these entities
has been restored. They need more capital to meet the

(58:03):
needs of their capital rule. But they could raise that
capital as they were doing now by retaining their earnings
which are substantial, and building more capital. They could raise
that capital by accessing the public markets and doing reipos
if they were released from conservatorship. Congress is an unnecessary party.
The Congress has already authorized the release from conservatorship, subject

(58:26):
to meeting the standards that Congress laid out in two
thousand and eight, and with regard to the creation of
a new product, which is what this would be for
the two entities to create a secondary market in mezzanine lending.
That doesn't require Congress. That requires the authorization of the
Treasury Department to permit their portfolio to be used for
this purpose, and the FHFA as conservator and as regulator.

(58:51):
So this is something that could be done by so
called administrative action.

Speaker 2 (58:55):
We don't know who's going to win in November, and
you mentioned that when Trump was the president, before Minuchin
had started to make some steps, including ending the SWEEP
to recapitalize it and essentially make it a properly for
profit entity. Again, if that were to happen at some
point under a theoretical second Trump administration, would that preclude

(59:18):
this avenue or there would be no constraint this under
a different Yeah, it doesn't have to be under conservatorship
for this to happen.

Speaker 4 (59:24):
This could be done under conservatorship by administrative action and
the cooperation between Treasuring and the FHIFA. It could also
be done post conservatorship. If the capital rule permits it,
the regulator then not the conservator were to permit it, okay.
And you know, it seems based on what I've heard
about what the second Trump administration would do, I think

(59:46):
ending the Conservative ships is something that a new Trump
administration would pursue. Trump actually submitted after in one of
the litigations, he submitted an affidavit saying I would have
done this had I, you know, not run out of time.
And you know, the Biden administration, We've had sixteen years
of conservatorships, twelve of them have been under democratic administrations.

(01:00:09):
The Democrats haven't shown a real appetite to end the conservatorships.
That seems to me the policy crowd around the Democrats
seem to, you know, like having these as direct instruments
of policy and under the thumb of the Executive Director
and the Treasury Department. But I think even the group

(01:00:29):
of policy advisors around the Democrats and the housing finance
policy complex, I think even they're coming to recognize that
a permanent conservatorship, which is kind of a limbo state,
is really not ideal, and that I think there's a
growing momentum to figure out how to end the conservatorships
and that these companies recapitalize and have, you know, more

(01:00:52):
normal corporate governance and a more normal relationship as a
regulated entity with a regulator, a regulator who's not also
the effectively the owner.

Speaker 3 (01:01:02):
If someone from the administration were to tap you on
the shoulder again and say, hey, do you want to
sort out the conservatorship issues and maybe implement a secondary
market for construction loans, would you be interested?

Speaker 4 (01:01:18):
You know, I didn't think I was coming here to advertise. Yeah, no,
I've been, like, I've been thinking about this for a
long time and working on it in various different guys.
Is so I know a little bit about it? Yeah, yeah,
I love a little bit. And you know, I do
think that one of the major problems the country faces

(01:01:39):
in terms of the stability of our civil society is
providing adequate housing for our citizens, and I think it's
really one of the great sources of tension. It's one
of the great sources of inflation, which is one of
the great sources of tension and in our economy. And
so you know, using these things that successfully reformed as

(01:02:02):
instruments to address this fundamental need would be something that
should be done. And whether I do it or you know,
they take the work I've done and somebody else does it,
it should be done.

Speaker 2 (01:02:15):
Jim Milston, fantastic conversation, learned so much, so much fun.
That was so much fun, fantastic. Hopefully it sounds like,
you know, I have no opinions, but it sounds like
a very promising idea. Maybe someone listening to this will
pick up the ball in some ways. Thank you so
much for coming out, Thanks for having me.

Speaker 4 (01:02:33):
I really appreciate it. Yeah, that was fantastic, great.

Speaker 2 (01:02:48):
Tracy. That was amazing. So, like we'll talk about the
housing element, but just like the history and the number
of like light bulb moments in that conversation, lingering things
that I didn't really understand where the source of that
implicit guarantee for Fanny and Freddy came from the arrangements
of you know, I sort of got the preferred stock

(01:03:09):
a bit, but that was just that was fantastic.

Speaker 3 (01:03:10):
I had forgotten the juicing earnings, like using your cheap
funding to buy alt A in Yeah, pre two thousand
and eight, I totally forgotten about that.

Speaker 4 (01:03:20):
The other thing that I.

Speaker 3 (01:03:21):
Was thinking, just hearing the war stories of the financial
crisis was how much letting Lehman Brothers go really did
crush financial markets? Oh, in many ways, like so much
so that a few days or even weeks later, like
the conversations about whether or not to bail out other
things seemed to have like it was just, yeah, let's

(01:03:42):
do what we can because we let this one entity
go and it's caused so many problems. Yeah, that seems
like an obvious statement to say in hindsight, but I
remember in two thousand and eight, two thousand and nine,
there was a vibrant and heated discussion about, you know,
whether letting Leman fail was the right thing to do.

Speaker 2 (01:04:01):
I know, no, it's incredible, And then you think about, like,
you know, what if, like you know, just the sheer
scale of AIG's role in this, and you like understand
why like they felt that they had to, you know,
inject one hundred billion dollars because of just the sheer
number of financial instruments all over the world. Some of

(01:04:21):
the US, a lot in Europe would have like gone
belly up without that.

Speaker 3 (01:04:24):
Yeah. The other thing I was thinking about again sort
of big picture realization, but how much of us, like
social programs, I guess for lack of a better word,
are wrapped up in like tax credits. Yeah, I know,
incentives versus direct fund So we.

Speaker 2 (01:04:39):
Got to do more, you know, one episode that we
should do and it's kind of in the context of
the Inflation Reduction Act, but that market I'm aware for
tax credits because if you don't if you let's say
you have some tax credit, but if you don't pay
taxes because of your money losing entity, which many again
this is in the irate context. Many of them are

(01:05:01):
because their startups so they don't get any value out
of that, or they're sort of new companies, you know,
making batteries. But with this secondary market that's emerged for
tax credit so that they can sell and Jim talked
about this a little bit, that you could sell that
text credit to someone who does want to reduce their bill,
Like that market is booming, and so we should do
an episode on that.

Speaker 3 (01:05:18):
Yeah, I would be totally up for that, but we
have to have Jim back On's to talk more totally
well the Treasury experience and all of that.

Speaker 2 (01:05:26):
Yeah, he would be a good one for a live episode. So,
like there's something like about you know, the history of whatever,
So we should keep that in mind. Idea on the
topic at hand. You know, it certainly seems there are
many constraints to housing. Clearly, finance is clearly a big one.
And if you're able to really expand that market, and

(01:05:46):
it's pretty clear it makes sense that if you have
the backstopping authority that then the commercial banks like a
JP Morgan would be more than happy to step into
that market and flip it for a small premium to
Fanyer or Freddy. But it does seem as though if
you could solve that problem, like there is serious numbers,
a few hundred thousand extra units per year in the math,
and it sounded like it made sense to me you

(01:06:08):
might actually be able to put a dent in this stuff.

Speaker 3 (01:06:10):
I mean, here's one thing I will say, we do
so many episodes here on all thoughts where we identify
a problem and we ask what the solution is, and
we effectively get no solution, no solution, or just crickets.
It was very nice to talk about a problem that
we have discussed previously on the show, the lack of housing,
and actually be able to talk about a potential solution.

Speaker 2 (01:06:31):
Yeah, and so two things on that that I had
thoughts about. So one is it's very powerful that we
have the vehicles already to do this in theory and
imagined that different lawyers might have different opinions. But like,
at least in theory, you know, there's a lot of
stuff that we could do with legislation, but nothing it's
so hard to get anything passed, right, So if you

(01:06:53):
have a way of doing something within an existing financing vehicle,
then that automatically, you know, among pie and the sky
dreams like that makes it a little less pie in
the sky. But it's also interesting to me just politically
that there is so much public anxiety about the cost
of housing and the housing shortage and all this stuff,

(01:07:13):
and people feel very stressed about their ability to come
up with a down payment or how much. And yet
like at the national political level, like it never really
comes up.

Speaker 3 (01:07:22):
Yeah, and it's just crazy concrete proposals. You certainly don't
hear Fanny or Freddy mentioned on like the debate stage.

Speaker 2 (01:07:30):
No, not ever, right, or you don't hear any like
I'm not going to say that Joe Biden or Trump
have no policies because I'm sure I know, like you know,
in Biden's budget there's something like I know, but it
is not something that given the amount of public anxiety
there is about the cost of housing relative to the
amount that politicians talk about ideas to solve the cost

(01:07:53):
of housing, it's like there's incredible disconnect to me.

Speaker 3 (01:07:56):
Well, also to Jim's point early on, this is one
of the few areas where there's seems to be some
bipartisan agreement, at least in the sense of identifying the
problem that housing is expensive, there is a structural shortage,
and maybe we should do something about that. Well, shall
we leave it there?

Speaker 2 (01:08:12):
Let's leave it there.

Speaker 3 (01:08:13):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy.

Speaker 2 (01:08:19):
Alloway and I'm Joe Wisenthal. You can follow me at
The Stalwart. Follow our producers Carmen Rodriguez at Carman Ermann
Dashel Bennett at Dashbot and Kelbrooks at Kelbrooks. Thank you
to our producer, Moses onm. For more Oddlots content, go
to Bloomberg dot com slash odd Lots, where we have transcripts,
a blog, and a newsletter. And if you want to
talk about these topics more with fellow listeners, you should

(01:08:41):
check out our discord. We have a real estate channel
in there. I'm sure there's gonna be a lot of
conversation about this one. Check out discord dot gg slash odlogs.

Speaker 3 (01:08:49):
And if you enjoy odd Lots, if you like it
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(01:09:12):
In order to do that, just go to Apple Podcasts,
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