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

27:32because 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$2.5 billion from the Treasury Department in a pinch. Now, just to size that up a little bit, by the time of the financial crisis, Fannie had probably$3 trillion of outstanding mortgage security guarantees. And Freddie, probably$2 trillion of outstanding. So each of them could borrow for their liquidity needs$2.5 billion 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.

28:21But nonetheless, investors believe that that meant between the federal charter and the right to borrow from the Treasury Department$2.5 billion, that somehow there was a guarantee by the federal government of these securities. 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. That's where it came from. So that it actually has some sort of real thing. So we're now in 2008. In the summer of 2008, the Congress of the United States passed the Housing and Economic Recovery Act of 2008, which was basically a complete redo of the regulatory arrangements around Fannie and Freddie.

29:04A new regulator was created, the Federal Housing Finance Authority that succeeded the former regulator, which had proven to be weak, and its authorities were buttressed. It was given authority to place Fannie and Freddie into receivership or into conservatorship, receivership being a liquidation proceeding, conservatorship being a conservatorship to conserve its operations and assets. And the Treasury Department under HERA, the Housing and Economic Recovery Act of 2008, was given authority to purchase preferred stock in order to ensure the solvency of Fannie and Freddie. So the implication became real or that was the moment that it was no longer ambiguous.

29:48Exactly. 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 8th of 2008, the conservatorships were created. And very quickly, by the first quarter of 2009, the preferred stock authority the Treasury had was deployed and the first big draws on that. And ultimately, by the end of 2010,$192 billion of preferred stock had been put into the two entities. Now, the markets recovered, right? In 2011, the equity market took off. in May of 2009 after the stress tests were announced.

30:40And the interbank market sort of recovered by the end of 2009. The banks started to trust each other again and lend to each other overnight. You still didn't have private label MBS, right? That took a while. And you still don't. No, you still don't. That market is almost completely dead. I have to say my expertise in housing finance ends in 2015 when I left FT and I came to Bloomberg. However, as far as I can tell, not much has changed since 2015. So the GSEs are still under conservatorship. You still don't have much private label MBS. There used to be proposals for sorting out housing finance, but I don't even see those that much anymore.

31:20Yeah. So let me give you the macro 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$50 trillion. If you took the aggregate value of the housing stock, the residential housing stock in the United States, it's about$50 trillion. That's the house value. There's$12 trillion of mortgage debt outstanding against that$50 trillion of house value. And of that$12 trillion, seven is on the balance sheet of Fannie and Freddie as guarantees of mortgage-backed securities. Those are mortgages. $7 trillion of that 12 has been securitized by Fannie Mae and Freddie Mac and guaranteed by them.

32:11Another$2 trillion is on the balance sheet of another government-sponsored entity called Ginnie Mae, which is controlled by the federal government. And it securitizes FHA and Veterans Authority administration loans. So there's about$2 trillion there. So when you add it up, of the$12 trillion of mortgage credit risk that is out there against the housing stock of the United States,$9 trillion is on Fannie Mae, Freddie Mac, and Ginnie Mae's balance sheets. So the government basically is the biggest player in the mortgage finance markets. None of these entities originate mortgages. That's all done by non-banks and banks.

32:52But most of the mortgage credit risk resides on the balance sheets of one of these three entities.

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33:45Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. Introducing the all-new Adobe Acrobat Studio. now with AI-powered PDF spaces. Do more with PDFs than you ever thought possible.

34:20Need AI to turn 100 pages of market research into five insights with a click? Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. So we have to get to the present tense, although, again, we 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 Fannie and Freddie, because there is this like little stub equity that trade.

35:05I think all the profits that they make go to the government. There's all kinds of lawsuits. But what is the form that they exist as today? Okay. So the good news is the two entities have been substantially reformed during this 16-year conservatorship. One of the biggest problems that they faced in 2008 was that they had become a huge buyer. Not only do they have this guarantee business where they guarantee mortgage-backed securities that are securitized out to institutional investors, But 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.

35:44And they went out and bought not so much the subprime private label securities, but they bought Alt-A, which was the sort of next step. I'm getting flashbacks. Right, exactly. So they bought a lot of Alt-A and 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 2004, 5, 6, and 7 as the subprime securitization market was taking market share away from the prime or conventional securitization market that they ran. So during the course of the conservatorships, the portfolios had 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.

36:38So the portfolios are down to$150 billion or$200 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, the FHFA, and they are slowly, through retained earnings, recapitalizing and building capital. So today, Fannie Mae has$80 billion of capital on its balance sheet, and Freddie probably has$50 billion. But they're still, from a regulatory capital point of view, undercapitalized. They need more capital based on the capital rule that was created to govern them during the conservatorship.

37:25So how did they even get to the point where they could, in conservatorship, have that much capital as they have today? In 2012, I believe it was, after I was gone from the Treasury Department, the Treasury Department changed the deal. And instead of a fixed dividend on that$192 billion worth of preferred stock, it became a so-called profit sweeps. So whatever profits they made went to the Treasury Department. And by 2019, seven years later, after the profit sweep was instituted and over which there's much litigation pending by existing shareholders, then existing shareholders. By 2019, when the profit sweep was suspended, the governor of the United States received$302 billion worth of dividends.

38:17Wow. So they made$192 billion investment. The Treasury Department's already received$302 billion back. So they've made more than$100 billion. They've way outdone my AIG profits. But it was suspended. So the Secretary Mnuchin, 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 entities have become fabulously profitable. Fannie 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.

39:12after all of that special assessment against their income and after tax, they're making sort of$15 billion a year. And Freddie's making about eight or nine billion a year. Fannie, the equity is worth$8 billion total. So you could see why private investors would love some legal ruling that gives them access to these profits. Yeah. Well, let's talk. That's a little misleading. Okay. Sorry. So what does the Treasury Department own? It owns$192 billion. It's actually more because of the way it accretes. But they own$192 billion for their$192 billion of investment of senior preferred stock. Under that is about$32 billion of junior preferred stock that third-party investors own.

40:00And 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 conservatorship. like the profit sweep. And under that is the common stock. But the common stock that trades only represents 20 % of the fully diluted equity because on top of the senior preferred stock, the Treasury Department has a penny warrant that can be exercised for one penny to buy 79 % of the stock of each entity. And this is very similar actually to the way AIG was set up. The TARP money went in as senior preferred, but we also had a warrant entitled the Treasury Department to 79 % of the stock.

40:45So today, the stock that trades really represents only 20 % of the total capitalization. Got it. But still, the equity account is teeny. Yeah. Because why is it teeny? Because you have that huge senior preferred stock that sits above all of the junior preferred and the common. Okay. 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 U.S. So we are already in a situation where, as you mentioned, nine of the 12 trillion, I think it was, mortgages outstanding in the U.S.

41:27effectively 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? 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 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.

42:15And if you look today at the real constraints on supply as a result of the inflation problems we've had over the last couple of years and the Fed's interest rate hiking, the construction finances 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 the equity owners. And so that market is almost frozen. There's been a surge of multifamily 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.

43:03And the supply 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 is a shortage of supply of somewhere between a million to five 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 a huge surge in rents because there's just more demand than there is supply to meet it.

43:51So going back to what these entities could do, again, I want to just take one further step back. What does the 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 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 homebuyers and lower-middle -income persons through the FHA and through a rental voucher program administered by HUD.

44:30They also, on the supply 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 bureaucratic 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 those tax credits for new projects. But if you have the patience 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.

45:12about somewhere between 25 % to 50 % of the cost of new construction is basically being subsidized through the tax code of the United States, the sale of tax credits. So a developer can build a project, sell the tax credits to somebody who needs them and offload about 20 % to 50 % 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 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 40%, you as the builder or developer, put up 40 % of the construction cost, you can get a loan for 60 % of the construction cost from a bank.

46:05So your equity is levered one and a half to one, 60-40. If the government were to provide 20 % of the construction cost in a mezzanine financing, so you could still get 60 % senior debt because the mezzanine would be expressly subordinated. It's the equivalent of equity from a senior lender's point of view. But now the equity holder, the developer only has to put up 20%. It's like a conventional mortgage, right? You put 20 % down, you get an 80 % loan. So here, the government could actually expand financing for new construction and thereby lever the equity of the developer four to one rather than traditionally one and a half to one.

46:50And 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, what qualifies as affordable housing, and still earn the same kinds of returns 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. Let's hear the math, both in terms of why affordable housing becomes more profitable under this, and then also the math of how many units we're talking about potentially this could unlock.

47:32Yeah. So this is private equity. Guys who listen to you will understand. Okay, good. And gals will understand this, right? So if you're levering your equity four times, you can effectively earn the same rate of return building lower priced units. That makes sense. 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 80 % AMI, average median income? What's affordable in government parlance is someone earning 80 % of area median income if their rent cost is only 30 % or less of that - That 80 % of AMI.

48:22Right, AMI, that's affordable. And so we tested this with a series of the large multifamily developers. And if they could lever their equity four to one with cheap mezzanine financing, they could build to those metrics. I wanna give you some more numbers. No, I love it. We're here for numbers. Yeah, just to - Yeah, yeah, yeah. Yeah, just to impress upon you just 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 1974 to deal with urban renewal because the inner cities were falling down in the 1960s.

49:03It's total budget today for new housing, for playgrounds, for urban renewal. Its total budget is about$4 billion. The military budget, just by contrast, is$800 billion. So we're investing$800 billion in our national defense and$4 billion in housing and urban renewal. Now we also have the tax credit program. And the tax credit program is responsible for building about 110 ,000 new units a year, which is big. But if we have a 5 million unit shortfall, if that alone is not going to fill that shortfall, it'll take 50 years to fill that shortfall at that level of subsidy. A mezzanine financing program, put aside for the moment where we would do that, who could do it.

49:56A 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? You finance the construction. As soon as the construction's done, the building's 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 Fannie and Freddie, who do takeout financing for new construction. So if there were a mezzanine lending program at the federal level, generally it's three to five years from permitting to completion on a new apartment development of any size.

50:39So 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 not a one-off. It's not a one-off. And it's also not a 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 could make a major impact on new supply of new housing. So just to size it, if there were$100 billion of mezzanine lending authority, and so$20 billion a year, because it takes five years from permitting to construction, so we'd put out$20 billion a year in effect in a revolving fund.

51:25So in year six, you get the year one loan paid back, you put it back to work in year six. So$20 billion a year, and that$20 billion is 20 % of the total construction cost. So you're now facilitating or turbocharging$100 billion of new construction a year. $100 billion of new construction a year would get you 250 to 400 ,000 new units a year, which means that one to five million dollar housing shortfall, unit shortfall, could be filled over the five-year period. 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.

52:09However, given the history of 2008, I think people hear leverage in the housing market and maybe start to get a little bit nervous. How risky are those construction loans? Because I assume, you know, in 2023, I think there was a drop of like 40 % 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 that with the interest rate uncertainty, the numbers don't pencil out. And so it's not that the loans themselves are inherently risky.

52:49It'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? Yeah. So the way I look at this is, if the standards that Fannie and Freddie now operate under for their mortgage purchases, 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 total income of the borrower that the mortgage represents, and the loan to value. So Fannie and Freddie can't buy a mortgage that has a loan-to-value higher than 80%, right?

53:36So you've got to put, as a new home buyer, you've got to put 20 % down in order to get a mortgage that ultimately ends up on Fannie and Freddie's books. Now, there are some exceptions to that, but 95 % of the mortgage credit that's on their books is on that basis of 20 % equity, 80 % 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 2008, you're going to have, you know, a higher rate of delinquency in default. Although I think even in 2008, multifamily, all the GSAs was fine.

54:15Yeah, the multifamily books was fine. Yeah. 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 shrink, then 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 have a growing population. Even though we're only adding half a million people a year by way of birth, we're 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 interest rates and the like.

54:59And location, location, location is important for housing always. But I think with 20 % equity underneath the government, the risk of a mezzanine lending program are very manageable. Why don't banks do more construction loans, though? They do, but they do at only up to 60%. There is a mezzanine market, but the mezzanine market is expensive and liquidity constrained. You can get another 5 % of your construction costs, but that's going to cost you 12 % to 18%, and that's eating into the equity holders' rates of return. So we already know that there are all kinds of legal fights going on with the Fannie and Freddie already, and you're sort of introducing a new market for them or your idea that has never existed.

55:49So there are sort of two things. One, you mentioned that in residential mortgages, they don't go out and extend a loan. They buy a loan from a bank. 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. No. The charters, those federal charters that created the implied guarantee, those federal charters prohibit them from entering. They would have to be a secondary market. Got it. Right. But if I'm JP Morgan and I know I can dump this mezzanine loan that I wrote to Fannie Mae, as long as it meets Fannie Mae's criteria, I can sell it immediately to Fannie Mae.

56:34And get it to spread. They'll write that loan. I have to imagine there are other legal questions. And you mentioned your lawyer, but 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? Yeah. So let's talk about the necessary steps. 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.

57:14It'll take 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 Fannie and Freddie 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 Fannie could create a secondary market in construction loans because, in fact, they did some of that back in the 1980s. So there's actual precedent for them buying construction loans. In the case of Freddie, there's probably a better argument that a more conservative lawyer than me, who's really being an advocate on this, might say that Freddie might be constrained in doing construction lending on a secondary market basis.

57:58But the truth is that the Congress of the United States recognizes it broadly. There is bipartisan recognition that we got a housing supply problem in the United States. So even if you don't use Fannie and Freddie as vehicles, you know, the hardest thing in America to do today is get a piece of legislation passed. So I'm not, you know, some wild-eyed optimist about the ability to create 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.

58:41Let's start$50 billion and against a$7 trillion budget, could they not find$50 billion to augment housing supply in America? I think they probably could. I think 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 GSEs doing direct lending into the mortgage market. But what they're effectively doing is using their balance sheet and their credit rating and their association with the U.S. government and their subsequent cheap capital costs to subsidize these mortgages effectively. So why not just go whole hog and have them extend the financing?

59:27Tracy, I'm with you. Okay. I'll bring you to the next meeting down in D.C. It's just politically infeasible. No, no, it's not. Well, first of all, this idea is getting traction at the state level, right? A number of the state housing finance agencies are starting to do this, recognizing the constraints on developers. We did an episode about the Montgomery County. Exactly. And the Massachusetts Housing Finance Agency has now gotten authority from the Massachusetts legislature to do some of this lending as well. So this is catching on. I mean, this is, you know, I didn't invent this. There are a variety of people who have thought this mezzanine lending by state or federal agencies could help lever developer equity and augment the supply or turbitize the supply of new housing.

1:00:14But I think even at the federal level, this is getting some interest. The problem is we're in election season. Right. And try as we might to get new initiatives passed by an existing administration. You know, they're a little diverted on getting reelected. Dave, all that stuff going on. So just to be clear then on this, right, there are theoretically multiple ways that the U.S. government could use its borrowing authority or its lending capacity to facilitate this. It doesn't necessarily have to be through Fannie and Freddie. But if it were through Fannie and Freddie, would that require legislation?

1:00:51So why don't you walk us through that component? Who 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? Yeah. So in conservatorship, Fannie and Freddie 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$192 billion 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.

1:01:33The 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, 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 Fannie and Freddie. But as I said, you know, getting— But they are not necessary to vote affirmatively for this. Yeah, so this is—so when HERA was passed in 2008, it created authority to create the conservatorships and end the conservatorships.

1:02:15You know, the purpose of the conservatorships 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 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, you know, re-IPOs if they were released from conservatorship. Congress is an unnecessary party. Congress has already authorized the release from conservatorship subject to meeting the standards that Congress laid out in 2008.

1:02:55And 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. So this is something that could be done by so-called administrative action. We don't know who's going to win in November. And you mentioned that when Trump was the president before Mnuchin had started to make some steps, including ending the sweep to recapitalize it and essentially make it a properly for profit entity again.

1:03:36If that were to happen at some point under a theoretical second Trump administration, would that preclude this avenue or there would be no constraint under a different – it doesn't have to be under conservatorship for this to happen? This could be done under conservatorship by administrative action and the cooperation between Treasury and the FHFA. It could also be done post-conservatorship if the Capitol 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 a second Trump administration would do, I think ending the conservatorships is something that a new Trump administration would pursue.

1:04:17Trump 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 16 years of conservatorships. Twelve of them have been under Democratic administrations. The Democrats haven't shown a real appetite to end the conservatorships. It seems to me the policy crowd around the Democrats seem to like having these as direct instruments of policy and under the thumb of the executive director in the Treasury Department. But I think even the group of policy advisors around the Democrats in 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.

1:05:09And I think there's a growing momentum to figure out how to end the conservatorships and let these companies recapitalize and have more normal corporate governance and a more normal relationship as a regulated entity with a regulator, a regulator who's not also effectively the owner. Yeah, that's interesting. 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? 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 guises.

1:05:53So I know a little bit about it. Yeah, a little bit. And, you know, I do think that one of the major problems the country faces 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 in our economy. And so, you know, using these things that have been successfully reformed as 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.

1:06:40Jim Milstein, fantastic conversation. Learned so much. That was 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 on. Thanks for having me. I really appreciate it. Yeah, that was fantastic. Great.

1:07:13Tracy, 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 Fannie and Freddie came from. Yeah. The arrangements of, you know, I sort of got the preferred stock, but that was just that was fantastic. I had forgotten the juicing earnings through like using your cheap funding to buy Alt-A in pre-2008. I totally forgotten about that. The other thing that I was thinking, just hearing the war stories of the financial crisis, was how much letting Lehman Brothers go really did crush financial markets in many ways.

1:07:57Like so much so that a few days or even weeks later, like the conversations about whether or not to bail out other things seem to have like it was just, yeah, let's 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 2008, 2009, there was a vibrant and heated discussion about, you know, whether letting Lehman fail was the right thing to do. 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 a hundred billion dollars because of just the sheer number of financial instruments all over the world.

1:08:46Some in the US, a lot in Europe would have like gone belly up without that. Yeah. The other thing I was thinking about, again, sort of big picture realization, but how much of U.S. like social programs, I guess, for lack of a better word, are wrapped up in like tax credits. Yeah, I know. Incentives versus direct funding. So we 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 you're a money losing entity.

1:09:22Yeah. which many, again, this is in the IRA context, many of them are because they're 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 credits so that they can sell. And Jim talked about this a little bit that you can sell that tax credit to someone who does want to reduce their bill. Like that market is booming. And so we should do an episode on that. Yeah, I would be totally up for that. But we have to have Jim back on. He's so good. Talk more about the Treasury experience and all of that.

1:09:51Yeah, he would be a good one for a live episode to do something about the history of whatever. So we should keep that in mind. Oh, that's a great idea. On the topic at hand. 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 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 Fannie or Freddie. 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.

1:10:31It sounded like it made sense to me. You might actually be able to put a dent in this stuff. 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. 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.

1:11:07And I imagine 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 have a way of doing something within an existing financing vehicle, then that automatically, you know, among pie in 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. And people feel very stressed about their ability to come up with a down payment or how much.

1:11:42And yet, like at the national political level, like it never really comes up. Yeah. And it's this crazy concrete proposals. You certainly don't hear Fannie or Freddie mentioned on like the debate stage. 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 of housing. It's like this incredible disconnect to me.

1:12:21Well, also, to Jim's point early on, this is one of the few areas where there 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, should we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Ehrman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks.

1:12:54Thank you to our producer, Moses Andam. For more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter. And if you want to talk about these topics more with fellow listeners, you should check out our Discord. We have a real estate channel in there. I'm sure there's going to be a lot of conversation about this one. Check out Discord.gg slash OddLots. And if you enjoy Odd Lots, if you like it when we talk about solutions to problems rather than just discuss how endemic those problems actually are, then please leave us a positive review on your favorite podcast platform.

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