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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.

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Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway.

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Speaker 2: So, Tracy, something that we've touched on a few times

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Speaker 2: is this sort of I guess I would say perverse

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Speaker 2: situation by which you know, the FED is raising interest

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Speaker 2: rates in an attempt to get inflation back to target,

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Speaker 2: and you know, it seems like they're kind of having

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Speaker 2: some success there and maybe we might begin a cutting cycle.

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Speaker 2: But in the process of raising raids, you constrain supply

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Speaker 2: of housing in particular, which is a you know, a

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Speaker 2: big affordability crisis, one of the big long term upward

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Speaker 2: sources of pressure on prices.

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Speaker 3: Right, So higher rents and house prices are part of

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Speaker 3: the higher inflation story. And one way of dealing with

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Speaker 3: higher prices is to build out supply, right. But if

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Speaker 3: you're raising rates to offset inflation, then building out that

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Speaker 3: supply becomes more expensive and there's more uncertainty and people

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Speaker 3: don't necessarily want to do it. And then just to

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Speaker 3: add to that against that whole backdrop of inflation, I

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Speaker 3: think it's funny how fast this kind of faded into

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Speaker 3: the background, but we still had that mini banking drama

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Speaker 3: crisis or whatever you want to call it from last year,

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Speaker 3: which did kick off some credit tightening, particularly in commercial

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Speaker 3: real estate, and commercial real estate, as we've mentioned a

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Speaker 3: number of times on the podcast, includes multifamily residential.

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Speaker 2: Right, So there's all this stress, and you know, in

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Speaker 2: the short term, it seems like rate hikes have probably

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Speaker 2: had some effect on cooling the economy, but there are

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Speaker 2: long term costs associated with that. Everybody is aware of this,

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Speaker 2: and it does seem to be according to many economists,

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Speaker 2: the sort of deep structural housing shortage and the effort

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Speaker 2: to fight inflation constraints that. So the question is, like,

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Speaker 2: is there some solution here or do we just have

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Speaker 2: to accept that this is the reality?

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Speaker 3: Yeah, I guess the big question is how do you

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Speaker 3: get people to build more?

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Speaker 4: Yeah? Right?

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Speaker 3: Especially yes, yes, especially at a time when like there

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Speaker 3: are incentives out there that seem to be working against

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Speaker 3: doing that. So you have the higher interest rates, so

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Speaker 3: maybe now is not the time when you want to

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Speaker 3: spend a bunch of capital to build something new. Maybe

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Speaker 3: you want to wait for interest rates to go down.

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Speaker 3: And then also, this is a controversial statement, but I

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Speaker 3: saw you tweeting about it earlier today, Joe. But like

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Speaker 3: I do wonder, you know, if you're a property development

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Speaker 3: and you're building luxury apartments and there's all this question

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Speaker 3: about like population density and zoning and things like that,

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Speaker 3: maybe part of the incentive is you don't want to

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Speaker 3: build that much because you could make money just by

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Speaker 3: you know, constraining the supply and seeing prices go up.

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Speaker 2: That's right, and there's certainly like you know, the way

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Speaker 2: people talk about it is that if you're a developer

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Speaker 2: and you own land, you have a real option and

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Speaker 2: you don't have to build the moment you acquire the land,

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Speaker 2: and you can wait until a stronger conditions. So it's

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Speaker 2: actually like getting the policy mix right.

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Speaker 1: You know.

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Speaker 2: People focus on zoning, and I'm sure that's an aspect,

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Speaker 2: and then the housing supply chain and labor and all

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Speaker 2: this stuff. It's a multifaceted challenge to do it. But

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Speaker 2: you know, we need some ideas here about how we're

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Speaker 2: actually going to produce more housing units in this country.

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Speaker 3: Yes, and you mentioned multifaceted. We have the perfect guests

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Speaker 3: to talk about this very multifaceted and nuanced issue of

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Speaker 3: how do you build more multifamily in the US.

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Speaker 2: That's right. We have truly the perfect guest, because he

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Speaker 2: might even I think he's even going to give us

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Speaker 2: a solution, or at least a partial solution to this challenge.

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Speaker 2: We're going to be speaking with Jim Milstein. He is

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Speaker 2: the co chair currently of Guggenheim Securities. Previously, he was

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Speaker 2: the Chief Restructuring Officer at the Treasury from two thousand

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Speaker 2: and nine through twenty eleven. So I was dealing with

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Speaker 2: a lot of aig stuff at the time, right in

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Speaker 2: the wake or in the sort of immediate time of

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Speaker 2: the Great Financial Crisis. Previously to that, he was at Lazard.

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Speaker 2: He's also done work on Fanny and Freddy or attempted

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Speaker 2: to look into the challenge of restructuring these big housing

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Speaker 2: banks that we have in this country, and maybe he

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Speaker 2: can shed some light on possible situations to at least

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Speaker 2: alleviate some of the financing strains of the housing problem. So, Jim,

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Speaker 2: thank you so much for coming on odd Lots.

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Speaker 4: Well, thanks for having me.

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Speaker 2: Why do you give us the sort of you went

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Speaker 2: to Treasury and Tim Geitner called you up and said,

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Speaker 2: come help us fix this gigantic mess that we have.

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Speaker 2: Why do we start there? What did you do when

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Speaker 2: you're at Treasure.

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Speaker 4: I came in right at the beginning of the new administration,

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Speaker 4: and you know, we were in the middle. The financial

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Speaker 4: crisis was in full blue. Yeah, at that point right started.

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Speaker 4: Really the seeds were planted in two thousand and seven

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Speaker 4: and six from the whole subprime mortgage crisis and where

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Speaker 4: all of that credit risk resided in various banks and

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Speaker 4: other financial institutions, including AIG. And so I was asked

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Speaker 4: to get my hands around AIG first and foremost we

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Speaker 4: had put by the.

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Speaker 3: Wait, can I just ask? I always wondered this, but like,

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Speaker 3: how does the ask? What form does the ask? Actually

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Speaker 3: just get a phone call one day and it's like,

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Speaker 3: can you sort out what was it? Billions, if not

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Speaker 3: trillions worth of AIG monoline insurance?

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Speaker 4: Yeah, I mean desically, there was a meeting in the

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Speaker 4: Secretary's office with the team that he had assembled, a

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Speaker 4: bunch of you know, financial experts that he had brought in.

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Speaker 4: There were some longtime Treasury officials, but mostly a bunch

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Speaker 4: of outsiders came in and he built himself a little

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Speaker 4: investment bank inside the Treasury Department to deal with all

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Speaker 4: of these institutions that were, you know, that were wobbling.

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Speaker 4: And so by the time I got there, the federal government,

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Speaker 4: between the FED and the Treasury Department's Start program, had

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Speaker 4: put one hundred and thirty billion dollars into AIG and

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Speaker 4: most of that was to shore up the capital of

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Speaker 4: the various insurance companies, but the bulk of it and

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Speaker 4: the immediate need went to AIGFP, which had written a

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Speaker 4: series of credit default insurance swaps and had relied on

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Speaker 4: AIG's credit rating, which had been double A, as a

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Speaker 4: substitute for cash collateral on those trades. And when the

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Speaker 4: rating agencies, in their infinite wisdom, downgraded AIG credit rating

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Speaker 4: from double A to single A, it required a massive

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Speaker 4: cash collateralization in order to keep those trades in place.

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Speaker 4: So within six weeks, AIG was into the FED for

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Speaker 4: about one hundred billion dollars and all of that went

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Speaker 4: right into AIGFB to cash collateralize their trades, so they

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Speaker 4: didn't default on Goldman Sacks, on SoC Gen, on BNP,

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Speaker 4: on Bank of America, on the various insurance they had

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Speaker 4: written in their favor, on various structured finance products. And

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Speaker 4: it was a black hole. And one of the real

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Speaker 4: problems with AIG was that it was not regulated by

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Speaker 4: the Fed, by the Treasury Department, by anyone at the federal.

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Speaker 2: Level of insurance is like fifty state regulators.

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Speaker 4: And AIG was expert at regulatory arbitrage. So there was

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Speaker 4: a insurance regulator I think it was either in Delaware

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Speaker 4: or Maryland that was the primary regulator of this worldwide.

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Speaker 4: The largest insurance company in the world, it was also

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Speaker 4: the largest aircraft leasing company in the world, one of

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Speaker 4: the largest consumer finance companies in the world, and one

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Speaker 4: of the largest participants in the credit default insurance market.

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Speaker 4: So how do you end up getting settled with AIG?

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Speaker 4: So he called into his office the team and said

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Speaker 4: somebody's got to take charge of it, and basically everybody

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Speaker 4: else in the room took a giant step back.

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Speaker 3: That left me into the hedge exact style.

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Speaker 4: Oh thank you, Jim for volunteering. So I spent a

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Speaker 4: ton of time up at Wilton, which is where AGFP

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Speaker 4: was located, talking to the guys who ran the twenty

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Speaker 4: two desks, which were twenty two different trades that they

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Speaker 4: had put on. And I got to tell you, I

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Speaker 4: think of myself as a I was worked as a

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Speaker 4: lawyer for eighteen years and then as a banker for

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Speaker 4: ten years before this, and I think of myself as

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Speaker 4: a reasonably smart guy who can figure things out. It

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Speaker 4: took me two weeks to really just understand what they

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Speaker 4: had done and what they were doing, and to whom

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Speaker 4: they owed their insurance and the impacts then what we

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Speaker 4: call the interconnectedness and potential contagion effects of their failing

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Speaker 4: to make good on their insurance.

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

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Speaker 4: We'll get there. We'll get there.

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Speaker 3: I have so many questions just about this particular period

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Speaker 3: of time, But when you say it took two weeks

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Speaker 3: to figure out just what was going on and what

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Speaker 3: the network of who owed what to whom actually looked like.

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Speaker 3: What was the system like back then? Was it just

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Speaker 3: like actual hard copy contracts or was there an Excel

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Speaker 3: spreadsheet somewhere retangle it?

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Speaker 4: They were reasonably sophisticated in terms of their digitization of

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Speaker 4: their records. But the truth is is that you know

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Speaker 4: these were bespoke trades, and so without probing each of

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Speaker 4: the managers of each of the desks on you know

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Speaker 4: how it came to be that you had, you know,

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Speaker 4: six hundred billion dollars worth of exposure on internal securitizations

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Speaker 4: that European banks had done on their credit portfolios, where

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Speaker 4: AIG what do they call this the capital structure arbitrage desk,

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Speaker 4: where banks would basically create an internal securitization, create a

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Speaker 4: senior and subordinated trnch in their loan books, and AIG

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Speaker 4: would write credit insurance credit to fault protection against the

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Speaker 4: senior trench and thereby transform a book that would otherwise

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Speaker 4: have had a credit rating of overall on average double

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Speaker 4: B and turn the senior tranch into double A, which

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Speaker 4: was where their credit rating was at the time AIG's

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Speaker 4: credit rating was at the time, with the result that

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Speaker 4: the bank's capital charges on that loan book would be reduced. Yeah. Right,

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Speaker 4: And AIG was paid handsomely for the privilege of helping

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Speaker 4: the banks do this, and mostly it was European banks.

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Speaker 3: So this reminds me of something else that I want

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Speaker 3: to ask you, But the decision to recapitalize AIGs so

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Speaker 3: it could make good on some of these guarantees, and

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Speaker 3: maybe this will be relevant to our conversation later about housing.

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Speaker 3: But how much discussion was there at the time about

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Speaker 3: moral hazard because I do remember the headlines about how

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Speaker 3: bailing out AIG was in effect a bailout of big banks,

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Speaker 3: including there was a big controversy at the time about

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Speaker 3: Goldman Sachs and how much it benefited from the AIG bailout.

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Speaker 3: But what was that aspect of the conversation, like.

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

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Speaker 3: Our producers add in a little sound effect like do

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Speaker 3: dig so?

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Speaker 4: On September eighth, Secretary Paulson and the newly created regulator

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Speaker 4: over Fanny and Freddy, the FAHFA, the Federal Housing Finance Authority,

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Speaker 4: which had succeeded something called the FAO, which had done

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Speaker 4: a miserable job of regulating Fanny and Freddy, put Fanny

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Speaker 4: and Freddy into conservatorship on September eight, two thousand and eight. Okay,

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Speaker 4: On September fifteenth, AIG's credit rating was downgraded and as

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Speaker 4: a result, the massive cash collateral call was required on

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Speaker 4: their derivatives book, cash they didn't have, and on September fifteenth,

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Speaker 4: at midnight, Lehman Brothers filed for Chapter eleven, creating really

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Speaker 4: the beginning of the widespread panic in all financial markets

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Speaker 4: because of the size of Lehman brother's own derivative book,

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Speaker 4: mostly the repo book right where they were both a

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Speaker 4: lender and a borrower in the short term overnight repo markets.

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Speaker 4: So that destabilized the financial system. And I think as

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Speaker 4: a result of the impact of the Lehman filing, the

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Speaker 4: New York Fed decided that to throw the largest insurance

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Speaker 4: company into a receivership or rehabilitation proceeding under state law,

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Speaker 4: which is where it would occur, would just creater the

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Speaker 4: financial markets and accelerate the panic that occurred with Lehman.

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Speaker 4: And so the New York Fed wrote the largest loan

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Speaker 4: and recorded human history in favor of AIG. Seventy five

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Speaker 4: billion dollars was extended to AIG in order to make

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Speaker 4: sure that it did not fail right then and there.

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Speaker 3: Imagine the junior lawyer whose tasked was like getting that

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Speaker 3: loan signed by both parties.

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Speaker 4: So AIG went through that loan within six weeks, just

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Speaker 4: drew the whole thing down. And on top of that,

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Speaker 4: the Fed then separately extended basically a broker dealer loan.

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Speaker 4: They did clateralize lending to AIG in order to give

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Speaker 4: it incremental liquidity. In October, the TARP legislation would finally passed,

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Speaker 4: and that gave the Treasury Department seven hundred and fifty

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Speaker 4: billion dollars of firepower to do something with. Initially, Secretary

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Speaker 4: Paulson thought, and that's what he sold Congress on, that

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Speaker 4: he was going to buy troubled assets off of bank

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Speaker 4: balance sheets in order to create liquidity for the banks.

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Speaker 4: The problem with that was the price at which you

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Speaker 4: could buy those trouble assets if you were protecting the taxpayers,

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Speaker 4: would reveal the deep insolvency of many of these banks

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Speaker 4: if they were forced to sell their assets at highly

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Speaker 4: discounted prices. So he very quickly changed course and decided

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Speaker 4: to recapitalize the entire industry by buying preferred stock. And

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Speaker 4: so the one hundred and thirty five billion that I

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Speaker 4: talked about the Fed being into AIG for under their

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Speaker 4: Emergency Lending authority under Section thirteen to three. There was

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Speaker 4: a first recapitalization of that one hundred and thirty five

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Speaker 4: billion dollars done in November and December of two thousand

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Speaker 4: and eight after TARP passed, where fifty billion dollars of

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Speaker 4: tart money was brought in to refinance out fifty billion

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Speaker 4: dollars of the Fed's lending to AIG. So at that point,

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Speaker 4: the FED was into AIG for call it seventy five

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Speaker 4: billion dollars of senior secured loan at the parent level,

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Speaker 4: and the Treasury Department owned fifty billion dollars worth of

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Speaker 4: preferred stock at the parent level.

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Speaker 2: I love talking about this stuff because you know, this

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Speaker 2: is like where we start our career, so this is like,

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Speaker 2: you know, it could go on this forever, but AIG

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Speaker 2: did get cleaned up.

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Speaker 4: It's fun.

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Speaker 2: I always get a kick out of looking at the

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Speaker 2: stock of AIG because if you just look at like

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Speaker 2: a ten year chart, it looks like a normal thing,

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Speaker 2: you know, like a normal stock price because it's still trades,

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Speaker 2: but like on a split adjusted basis, So it's like

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Speaker 2: a seventy six dollars stock right now, but because of

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Speaker 2: the just gigantic dilution and the split, it was like

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Speaker 2: a fourteen hundred dollars stock equivalent back then. So it's

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Speaker 2: just you know, it was saved, but the equity was

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Speaker 2: truly a visceery.

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Speaker 4: Yeah, so I'll just take you to the end of

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Speaker 4: that stock. Okay, in order to pay back the FED

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Speaker 4: Yeah and pay back the Treasury, we had to downsize

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Speaker 4: and de risk the company. So we did a series

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Speaker 4: of asset sales over eighteen months. We sold off one

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Speaker 4: of the largest consumer finance companies in the United States.

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Speaker 4: We sold off the aircraft leasing business. We sold the

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Speaker 4: Asian life insurance businesses. They were the largest life insurance

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Speaker 4: provider in Asia, including China.

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Speaker 2: They had one of the only really founded in China right.

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Speaker 4: Well, they founded, but they had one of the first

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Speaker 4: licenses and only persisting licenses to provide insurance by a

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Speaker 4: foreign entity in China. We sold off the Middle East

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Speaker 4: Life insurance operations. We sold off the European life insurance operations,

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Speaker 4: and then having generated all of those asset sale proceeds,

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Speaker 4: had could pay off the FED Alan and that left

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Speaker 4: the Churchury preferred stock in place, and we then had

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Speaker 4: to do a complete recapitalization, and as you noted, we

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Speaker 4: converted the preferred into ninety two percent of the fully

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Speaker 4: deluded common equity, diluting the existing common down from one

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Speaker 4: hundred percent ownership to eight percent. And over the next

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Speaker 4: two years and twenty twelve twenty thirteen, the Teratury Department

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Speaker 4: sold off that ninety two percent of the common equity.

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Speaker 4: The net result of that was all in between interest

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Speaker 4: dividends and asset sale proceeds and stock sale proceeds. The

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Speaker 4: Government of the United States made twenty two billion dollars

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Speaker 4: on its one hundred and fifty billion dollar investment in EIG.

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Speaker 2: So AIG was just one of there were many troubled

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Speaker 2: institutions that floated to the surface of that time all

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Speaker 2: of their troubles. AIG was a huge one, and there

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Speaker 2: were those ones that went bankrupt, and then there was

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Speaker 2: also Fanny and Freddy, which still exists and which still

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Speaker 2: also have some sort of weird equity that I don't understand.

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Speaker 2: And there was for the last fifteen or so years.

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Speaker 2: There's always talking about reform, and you know, there's all

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Speaker 2: these lawsuits and stuff like that. So Geitner asked you

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Speaker 2: to try to figure out something with Fan what happened

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Speaker 2: with that after so AIG cleaned it up, and yeah,

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Speaker 2: solved that, I guess.

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Speaker 4: Yeah, And by you know, the time we got the

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Speaker 4: AIG recapitalization agreed and consummated in January of twenty eleven. Yeah,

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Speaker 4: all that needed left to be done on that was

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Speaker 4: to sell the stock we had converted the pervert into

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Speaker 4: and you know, any monkey could do that. They didn't

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Speaker 4: need me for that. So I went into the secretary

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Speaker 4: and suggested that it was time for me to leave,

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Speaker 4: having done what I came to do and was asked

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Speaker 4: to do. And I had worked on a bunch of

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Speaker 4: other things along the way. They've sort of all hands

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Speaker 4: on deck kind of situation for the first two years. Sure,

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Speaker 4: And he said, well, you know what about Fanny and Freddy?

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Speaker 4: And I said, what about it? And he said, well,

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Speaker 4: why did you take a look?

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

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Speaker 4: Yeah, and there had been an ongoing interagency study group

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Speaker 4: to try to figure out what to do with them,

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Speaker 4: And so I looked at their twenty five volumes of

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Speaker 4: work product and then came back with something not dissimilar

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Speaker 4: to that which we had done with AIG. So at

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Speaker 4: that time, just to sort of situate this, by twenty eleven,

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Speaker 4: between Fanny and Freddy, the Treasury Department had purchased one

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Speaker 4: hundred and ninety two billion dollars worth of preferred stock

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Speaker 4: in the two of them, sort of one hundred and

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Speaker 4: twenty and Fanny and seventy and Freddy. But so maybe

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Speaker 4: it's important to the full story here is to understand

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Speaker 4: how that rescue occurred, similar to the way the TAR

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Speaker 4: program was ultimately deployed, where they purchase a preferred stock

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Speaker 4: in effect, and if you think of what the purchase

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Speaker 4: of preferred stock does for third party investors in large

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Speaker 4: financial institutions, it's basically the government of the United States

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Speaker 4: saying your entire liability structure, you J. P. Morgan, you,

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Speaker 4: Fanny and Freddy, you b of A, you're good. Anybody

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Speaker 4: who has a debt claim or a contract claim against

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Speaker 4: a large financial institution that has a significant preferred stock

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Speaker 4: investment from the federal government. The federal government is basically saying,

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Speaker 4: you guys are money good because we're junior to you

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Speaker 4: in the capital structure.

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Speaker 3: This was back in the time when there was still

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Speaker 3: debate about whether or not Fannie May and Freddie Mack

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Speaker 3: their guarantees were the same as a government guarantee.

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

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Speaker 2: So we're doing this episode in reverse, getting further and

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Speaker 2: further back away from the time.

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Speaker 4: Yeah, so Fanny and Freddie are so called government chartered.

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Speaker 4: They have charters that derive from the Congress of the

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Speaker 4: United States Financial Institutions, unlike JP Morgan, which is organized

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Speaker 4: under state law I think in Delaware or maybe New York,

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Speaker 4: because it's like an amalgamation of a series of New

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Speaker 4: York banks and regulated by the FED and the FDIC

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Speaker 4: who provides insurance to them. Fanny and Freddy were chartered

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Speaker 4: by the federal government. Fanny actually derives back from the

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Speaker 4: Great Depression. They were the first troubled asset purchase program.

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Speaker 4: They were organized to purchase defaulted debt mortgage loans off

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Speaker 4: the balance sheets of failing banks in the nineteen thirties,

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Speaker 4: and when they purchased them, they then restructured them. They

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Speaker 4: actually created the first long term mortgages in the United States.

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Speaker 4: Most mortgages were of five year storation back in the

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Speaker 4: nineteen thirties, and once purchased by Fanny, the way they

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Speaker 4: worked out those troubled loans was to extend the maturities

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Speaker 4: out first ten then eventually fifteen years in order to

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Speaker 4: give the barers time to get through the depression and

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Speaker 4: actually get current on their loans. So Fanny was then privatized.

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Speaker 4: It was government owned corporation throughout the thirties, forties, fifties, sixties,

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Speaker 4: and as the United States entered the Great Society Programs

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Speaker 4: and the Vietnam War and the deficits started to blow out.

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Speaker 4: With Fanny having all of that mortgage debt on the

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Speaker 4: balance sheet of the United States, they needed to get

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Speaker 4: it off balance sheet, so it was privatized, I think

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Speaker 4: in nineteen sixty eight, so its debts were no longer

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Speaker 4: consolidated with the debts of the United States federal government.

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Speaker 4: And then Freddy was formed in nineteen seventy because the

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Speaker 4: savings and loan industry thought, you know, they needed access

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Speaker 4: to the securitization market, just as the big banks who

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Speaker 4: were basically the customers of Vennie May. So you had

382
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Speaker 4: now two entities in effect buying mortgages, creating a secondary

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Speaker 4: market for mortgage credit that banks originated. So JP Morgan

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Speaker 4: would originate alone. As long as it met Fanny or

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Speaker 4: Freddy's criteria that the loan was at least had twenty

386
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Speaker 4: percent equity, that it didn't exceed a certain principal amount,

387
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Speaker 4: JPM could sell it to Fanny or Freddy. So they

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Speaker 4: were secondary market purchasers and ultimately in the nineteen eighties

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Speaker 4: when the securitization market was first developed, and that there

390
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Speaker 4: was a lot I was actually a lawyer at a

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Speaker 4: law firm that pioneered the securitisation market at that time.

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Speaker 4: There are a lot of legal issues that had to

393
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Speaker 4: be solved to create a trust into which mortgages could

394
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Speaker 4: be dumped and securities issued against the cash flows of

395
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Speaker 4: that pool of mortgages, and that market really was pioneered

396
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Speaker 4: and developed in the nineteen eighties. Then Fanny and Freddy,

397
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Speaker 4: as the owner of large amounts of mortgages, thereby could

398
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Speaker 4: create liquidity for themselves by selling mortgage securities mortgage backed

399
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Speaker 4: securities mbs and actually are mbs residential mortgage backed securities

400
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Speaker 4: to institutional investors and thereby do it all over again

401
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Speaker 4: provide incremental liquidity to the banking industry for the mortgages

402
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Speaker 4: they were originating.

403
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Speaker 3: Just to be clear, those bonds came with a guarantee

404
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Speaker 3: from Fanny and Freddy that they guaranteed principal and interest payments.

405
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Speaker 4: Of principle and interest on those bonds, okay.

406
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Speaker 3: And there was a debate pre two thousand and eight

407
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Speaker 3: about whether or not that guarantee was like effectively the

408
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Speaker 3: same as the US government guarantee those bonds.

409
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Speaker 4: So how did the market infer that it was as

410
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Speaker 4: good as treasuries that the bonds guaranteed by Fanny and Freddie.

411
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Speaker 4: So there were two essential elements of the quote implied guarantee.

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Speaker 4: One was they were federally chartered. Right, they were originally

413
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Speaker 4: instruments of the United States government, agencies of the United

414
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Speaker 4: States government federally charted, so in a sense they were

415
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Speaker 4: children of the federal government, even though they were privatized

416
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Speaker 4: and owned by you know, private equity investors. Because they

417
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Speaker 4: were federally chartered, the bond market thought, well, the government

418
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Speaker 4: of the United States, you know, has ownership of these

419
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Speaker 4: one way or another. Separately, in their charters, they had

420
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Speaker 4: authorization to borrow two and a half billion dollars from

421
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Speaker 4: the Treasury Department in a pinch. Now, just to size

422
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Speaker 4: that up a little bit. By the time I'm of

423
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Speaker 4: the financial crisis, Fanny had probably three trillion dollars of

424
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Speaker 4: outstanding mortgage security guarantees and Freddie probably two trillion of outstanding,

425
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Speaker 4: So each of them could borrow for their liquidity needs

426
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Speaker 4: two and a half billion dollars from the federal government.

427
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Speaker 4: So that was a drop in the bucket in terms

428
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Speaker 4: of what their liquidity needs might be compared to the

429
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Speaker 4: outstanding liabilities they had. But nonetheless, investors believe that that

430
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Speaker 4: meant between the Federal Charter and the right to borrow

431
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Speaker 4: from the Treasury Department two and a half billion dollars,

432
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Speaker 4: that somehow there was a guarantee by the federal government

433
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Speaker 4: of these securities.

434
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Speaker 2: This is so useful because I've always sort of known this, like, oh,

435
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Speaker 2: there was an implied guarantee, but I didn't actually know

436
00:25:46,760 --> 00:25:51,720
Speaker 2: that there were two specific underpinnings of where this implication

437
00:25:52,040 --> 00:25:52,440
Speaker 2: came from.

438
00:25:52,560 --> 00:25:53,480
Speaker 4: That's where it came from.

439
00:25:53,480 --> 00:25:55,480
Speaker 2: So then it actually has some sort of real bank.

440
00:25:55,720 --> 00:25:57,679
Speaker 4: So we're now in two thousand and eight. In the

441
00:25:57,720 --> 00:26:00,119
Speaker 4: summer of two thousand and eight, the Congress in the

442
00:26:00,200 --> 00:26:03,359
Speaker 4: United States passed the Housing and Economic Recovery Act of

443
00:26:03,400 --> 00:26:06,560
Speaker 4: two thousand and eight, which was basically a complete redo

444
00:26:06,560 --> 00:26:10,480
Speaker 4: of the regulatory arrangements around Fanny and Freddy. A new

445
00:26:10,520 --> 00:26:14,240
Speaker 4: regulator was created, the Federal Housing Finance Authority, that succeeded

446
00:26:14,240 --> 00:26:18,280
Speaker 4: the former regulator, which had proven to be weak, and

447
00:26:18,320 --> 00:26:23,560
Speaker 4: its authorities were buttressed it was given authority to place

448
00:26:24,320 --> 00:26:28,840
Speaker 4: Fanny and Freddie into receivership or into conservatorship, receivership being

449
00:26:28,880 --> 00:26:33,000
Speaker 4: a liquidation preceding conservatorship being a conservatorship to conserve its

450
00:26:33,000 --> 00:26:37,920
Speaker 4: operations and assets, and the Treasury Department, under HERA and

451
00:26:38,040 --> 00:26:40,320
Speaker 4: the Housing and Economic Recovery Act of two thousand and eight,

452
00:26:40,359 --> 00:26:45,679
Speaker 4: was given authority to purchase preferred stock in order to

453
00:26:46,000 --> 00:26:48,879
Speaker 4: ensure the solveignty of Fanny and Freddy.

454
00:26:49,119 --> 00:26:51,800
Speaker 2: So the implication became real or the yeah, that was

455
00:26:51,840 --> 00:26:54,640
Speaker 2: the moment that it was no longer ambiguous exactly.

456
00:26:54,680 --> 00:26:59,000
Speaker 4: And when Paulson went to the Congress to ask for

457
00:26:59,040 --> 00:27:02,600
Speaker 4: this authority, he said, look, if I have a howitzer,

458
00:27:03,080 --> 00:27:06,639
Speaker 4: I won't have to use it. But shortly thereafter he

459
00:27:06,760 --> 00:27:09,679
Speaker 4: had to use it, and September eighth of two thousand

460
00:27:09,680 --> 00:27:14,520
Speaker 4: and eighty the conservatorships were created, and very quickly, by

461
00:27:14,600 --> 00:27:18,840
Speaker 4: the first quarter of two thousand and nine, the preferred

462
00:27:18,880 --> 00:27:23,959
Speaker 4: stock authority the Treasury had was deployed and the first

463
00:27:24,000 --> 00:27:27,480
Speaker 4: big draws on that, and ultimately by the end of

464
00:27:27,520 --> 00:27:30,800
Speaker 4: twenty ten, one hundred and ninety two billion dollars of

465
00:27:30,880 --> 00:27:34,800
Speaker 4: preferred stock had been put into the two entities. Now

466
00:27:35,040 --> 00:27:39,240
Speaker 4: the markets were covered. Right in twenty eleven, the equity

467
00:27:39,280 --> 00:27:41,879
Speaker 4: market took off, and you know, May of two thousand

468
00:27:41,920 --> 00:27:45,280
Speaker 4: and nine after the stress tests were announced and the

469
00:27:45,480 --> 00:27:48,200
Speaker 4: interbank market sort of recovered. By the end of two

470
00:27:48,280 --> 00:27:51,000
Speaker 4: thousand and nine, they were the banks started to trust

471
00:27:51,040 --> 00:27:53,359
Speaker 4: each other again and lend to each other overnight.

472
00:27:54,000 --> 00:27:57,720
Speaker 3: You still didn't have private label mbs, right.

473
00:27:57,240 --> 00:28:00,800
Speaker 4: And you still don't know that market is almost completely dead.

474
00:28:00,880 --> 00:28:04,439
Speaker 3: I have to say my expertise in housing finance ends

475
00:28:04,800 --> 00:28:07,359
Speaker 3: in twenty fifteen when I left the FT and I

476
00:28:07,400 --> 00:28:10,800
Speaker 3: came to Bloomberg. However, as far as I can tell,

477
00:28:10,920 --> 00:28:15,000
Speaker 3: not much has changed since twenty fifteen, So the gsees

478
00:28:15,080 --> 00:28:18,800
Speaker 3: are still under conservatorship. You still don't have much private

479
00:28:18,880 --> 00:28:22,320
Speaker 3: label mbs. There used to be proposals for sorting out

480
00:28:22,320 --> 00:28:25,560
Speaker 3: housing finance, but I don't even see those that much anymore.

481
00:28:25,680 --> 00:28:28,800
Speaker 4: Yeah, So let me give you the macroh because it

482
00:28:28,800 --> 00:28:33,240
Speaker 4: goes to the housing supply issues. So if you took

483
00:28:33,320 --> 00:28:37,359
Speaker 4: the aggregate market capitalization of the public equity markets in

484
00:28:37,359 --> 00:28:40,760
Speaker 4: the United States, that's about fifty trillion dollars. If you

485
00:28:40,840 --> 00:28:45,120
Speaker 4: took the aggregate value of the housing stock, the residential

486
00:28:45,120 --> 00:28:48,920
Speaker 4: housing stock in the United States is about fifty trillion dollars.

487
00:28:49,400 --> 00:28:54,880
Speaker 4: That's the house value. There's twelve trillion dollars of mortgage

488
00:28:54,920 --> 00:28:58,800
Speaker 4: debt outstanding against that fifty trillion dollars of house value.

489
00:28:59,320 --> 00:29:04,080
Speaker 4: And of that twelve trillion dollars, seven is on the

490
00:29:04,120 --> 00:29:07,520
Speaker 4: balance sheet of Fanny and Freddy Is guarantees of mortgage

491
00:29:07,560 --> 00:29:10,800
Speaker 4: backed securities. Those are mortgages. Seven trillion of that twelve

492
00:29:10,840 --> 00:29:15,560
Speaker 4: has been securitized by Fannie May and FREDDIEMAC and guaranteed

493
00:29:15,600 --> 00:29:19,960
Speaker 4: by them. Another two trillion is on the balance sheet

494
00:29:19,960 --> 00:29:24,000
Speaker 4: of another government sponsored entity called Ginny May, which is

495
00:29:24,080 --> 00:29:29,040
Speaker 4: controlled by the federal government, and it securitizes faj and

496
00:29:29,440 --> 00:29:34,160
Speaker 4: Veterans Authority Administration loans. So there's about two trillion there.

497
00:29:34,200 --> 00:29:36,120
Speaker 4: So when you add it up, of the twelve trillion

498
00:29:36,160 --> 00:29:38,800
Speaker 4: dollars of mortgage credit risk that is out there against

499
00:29:38,840 --> 00:29:42,480
Speaker 4: the housing stock of the United States, nine trillion is

500
00:29:43,160 --> 00:29:46,800
Speaker 4: on Fannie MAE, FREDDIEMAC, and Ginny May's balance sheets. So

501
00:29:46,840 --> 00:29:51,160
Speaker 4: the government basically is the biggest player in the mortgage

502
00:29:51,160 --> 00:29:55,640
Speaker 4: finance market. None of these entities originate mortgages. That's all

503
00:29:55,680 --> 00:29:59,160
Speaker 4: done by non banks and banks, but most of the

504
00:29:59,160 --> 00:30:02,000
Speaker 4: mortgage credit risks resides on the balance sheets of one

505
00:30:02,000 --> 00:30:03,080
Speaker 4: of these three entities.

506
00:30:18,280 --> 00:30:21,640
Speaker 2: So we have to get to the present tense. Although

507
00:30:21,800 --> 00:30:24,360
Speaker 2: again you talk about this for three hours, but before

508
00:30:24,440 --> 00:30:27,360
Speaker 2: we just do because this is I think the last

509
00:30:27,400 --> 00:30:30,200
Speaker 2: step in understanding how we got to this point. Just

510
00:30:30,280 --> 00:30:36,600
Speaker 2: describe real quickly the current institutional and economic arrangement of

511
00:30:36,640 --> 00:30:39,040
Speaker 2: Fanny and Freddy. Because there is this like little stub

512
00:30:39,200 --> 00:30:42,000
Speaker 2: equity that trade. I think all the profits that they

513
00:30:42,000 --> 00:30:44,400
Speaker 2: may go to the government. There's all kinds of lawsuits.

514
00:30:44,400 --> 00:30:46,840
Speaker 2: But what is the form that they exist as today?

515
00:30:47,000 --> 00:30:49,360
Speaker 4: Okay, so the good news is the two entities have

516
00:30:49,440 --> 00:30:53,800
Speaker 4: been substantially reformed during this sixteen year conservatorship. One of

517
00:30:53,840 --> 00:30:56,040
Speaker 4: the biggest problems that they faced in two thousand and

518
00:30:56,080 --> 00:30:59,719
Speaker 4: eight was that they had become a huge buyer. Not

519
00:30:59,760 --> 00:31:03,560
Speaker 4: only they have this guarantee business where they guarantee mortgage

520
00:31:03,600 --> 00:31:07,560
Speaker 4: backed securities that are securitized out to institutional investors, but

521
00:31:07,640 --> 00:31:11,920
Speaker 4: they also had a huge portfolio investments where they borrowed

522
00:31:11,960 --> 00:31:16,160
Speaker 4: money at basically a slight premium to treasuries, so they

523
00:31:16,200 --> 00:31:20,520
Speaker 4: could fund a portfolio very cheaply, and they went out

524
00:31:20,560 --> 00:31:25,680
Speaker 4: and bought not so much the subprime private label securities,

525
00:31:25,720 --> 00:31:28,400
Speaker 4: but they bought all day, which was the sort of

526
00:31:28,560 --> 00:31:32,640
Speaker 4: next step, right exactly, So they bought a lot of

527
00:31:32,720 --> 00:31:34,800
Speaker 4: all day and they made it was a huge carry trade.

528
00:31:34,800 --> 00:31:38,640
Speaker 4: They were making a huge spread on those portfolios. Their

529
00:31:38,680 --> 00:31:43,000
Speaker 4: portfolios exceeded a trillion dollars combined between the two of them,

530
00:31:43,280 --> 00:31:46,280
Speaker 4: and that's how they were juicing their earnings in two

531
00:31:46,360 --> 00:31:50,320
Speaker 4: thousand and four, five, six, and seven, as the subprime

532
00:31:50,960 --> 00:31:54,920
Speaker 4: securitization market was taking market share away from the prime

533
00:31:55,120 --> 00:31:59,120
Speaker 4: or conventional securitization market that they ran. So during the

534
00:31:59,120 --> 00:32:02,959
Speaker 4: course of the conservative ships, the portfolios have been wound

535
00:32:03,000 --> 00:32:05,480
Speaker 4: down to the point where they're really now just transaction

536
00:32:05,600 --> 00:32:09,000
Speaker 4: portfolios where they borrow money to buy mortgages off bank

537
00:32:09,120 --> 00:32:13,000
Speaker 4: balance sheets before they can securitize them and repay that borrowing.

538
00:32:13,400 --> 00:32:16,120
Speaker 4: So the portfolios are down to, you know, one hundred

539
00:32:16,120 --> 00:32:19,720
Speaker 4: and fifty billion, you know, or two hundred billion at

540
00:32:19,760 --> 00:32:22,760
Speaker 4: most between the two of them, from the trillion dollars

541
00:32:22,800 --> 00:32:25,640
Speaker 4: they were coming at the beginning of the financial crisis.

542
00:32:25,680 --> 00:32:29,120
Speaker 4: So that's a major reform that's gone on. They've also

543
00:32:29,840 --> 00:32:33,680
Speaker 4: new capital standards have been imposed by their regulator and conservator.

544
00:32:33,720 --> 00:32:39,840
Speaker 4: The SHFA, and they are slowly through retained earnings recapitalizing

545
00:32:39,880 --> 00:32:43,680
Speaker 4: and building capital. So today I Fannie MAE has eighty

546
00:32:43,760 --> 00:32:48,760
Speaker 4: billion dollars of capital on its balance sheet and Freddy

547
00:32:48,800 --> 00:32:52,840
Speaker 4: probably has fifty billion. But they're still from a regulatory

548
00:32:52,880 --> 00:32:55,520
Speaker 4: capital point of view, under capitalized. They need more capital

549
00:32:55,800 --> 00:32:58,920
Speaker 4: based on the capital rule that was created to govern

550
00:32:58,960 --> 00:33:02,160
Speaker 4: them during the concern readership. So how did they even

551
00:33:02,200 --> 00:33:05,440
Speaker 4: get to the point where they could and conservership have

552
00:33:05,600 --> 00:33:11,120
Speaker 4: that much capital as they have today in twenty twelve,

553
00:33:11,160 --> 00:33:14,120
Speaker 4: I believe it was after I was gone from the

554
00:33:14,160 --> 00:33:17,440
Speaker 4: Treasury Department. The Treasury Department changed the deal and instead

555
00:33:17,440 --> 00:33:19,560
Speaker 4: of a fixed dividend on that one hundred and ninety

556
00:33:19,600 --> 00:33:22,720
Speaker 4: two billion dollars worth of preferred stock, it became a

557
00:33:22,880 --> 00:33:26,680
Speaker 4: so called profit sweep, so whatever profits they made went

558
00:33:26,720 --> 00:33:32,720
Speaker 4: to the Treasury Department. And by twenty nineteen, seven years later,

559
00:33:33,440 --> 00:33:36,400
Speaker 4: after the profit sweep was instituted and over which there's

560
00:33:36,560 --> 00:33:42,120
Speaker 4: much litigation pending by existing shareholders, then existing shareholders. By

561
00:33:42,240 --> 00:33:46,840
Speaker 4: twenty nineteen, when the profit sweep was suspended, the Governor

562
00:33:46,880 --> 00:33:50,400
Speaker 4: of the United States received three hundred and two billion

563
00:33:50,520 --> 00:33:54,480
Speaker 4: dollars worth of dividends so they made one hundred and

564
00:33:54,520 --> 00:33:57,960
Speaker 4: ninety two billion dollar investment. The Treasury Department's already received

565
00:33:58,240 --> 00:34:01,560
Speaker 4: three hundred and two billion backs. They've made more than

566
00:34:01,600 --> 00:34:07,000
Speaker 4: one hundred billion. They've way out done my AIG profits.

567
00:34:07,800 --> 00:34:12,800
Speaker 4: But it was suspended. So the Secretary Manuchin, President Trump's

568
00:34:12,840 --> 00:34:17,160
Speaker 4: former President Trump's Secretary of the Treasury, determined he was

569
00:34:17,200 --> 00:34:20,640
Speaker 4: going to try to recapitalize them and actually end the conservatorship,

570
00:34:20,640 --> 00:34:25,160
Speaker 4: and towards the end of that goal, he suspended the

571
00:34:25,160 --> 00:34:29,040
Speaker 4: profit sweep so they could build capital. And these two

572
00:34:29,160 --> 00:34:35,680
Speaker 4: entities have become fabulously profitable. Fanny makes you know, on average,

573
00:34:35,719 --> 00:34:37,760
Speaker 4: over the last four or five years, has been making

574
00:34:38,200 --> 00:34:41,920
Speaker 4: net after tax, net after a special charge that was

575
00:34:42,719 --> 00:34:44,960
Speaker 4: created as a pay for for an offset of one

576
00:34:44,960 --> 00:34:49,960
Speaker 4: of the Trump tax cuts. After all of that special

577
00:34:50,000 --> 00:34:54,120
Speaker 4: assessment against their income and after tax, they're making sort

578
00:34:54,160 --> 00:34:59,040
Speaker 4: of fifteen billion dollars a year, and Freddy's making about

579
00:34:59,160 --> 00:35:01,000
Speaker 4: eight or nine bi million a year.

580
00:35:01,760 --> 00:35:05,400
Speaker 2: Fanny the equity is worth eight billion dollars total. So

581
00:35:05,440 --> 00:35:08,760
Speaker 2: you could see why private investors would love some legal

582
00:35:08,840 --> 00:35:10,720
Speaker 2: ruling that gives them access to these profits.

583
00:35:10,800 --> 00:35:14,279
Speaker 4: Yeah, well, let's talk. It's not that's a little misleading. Okay, sorry,

584
00:35:15,120 --> 00:35:17,480
Speaker 4: So what is the Treasury Department own It owns one

585
00:35:17,520 --> 00:35:21,000
Speaker 4: hundred and ninety two billion. It's actually more because of

586
00:35:21,080 --> 00:35:22,759
Speaker 4: the way it accretes. But they own a one hundred

587
00:35:22,760 --> 00:35:24,440
Speaker 4: and ninety two billion dollars for their one hundred and

588
00:35:24,480 --> 00:35:27,400
Speaker 4: ninety two billion dollars an investment of senior preferred stock.

589
00:35:28,440 --> 00:35:32,680
Speaker 4: Under that is about thirty two billion of junior preferred

590
00:35:32,680 --> 00:35:35,239
Speaker 4: stock that third party investors own.

591
00:35:35,440 --> 00:35:35,760
Speaker 2: Okay.

592
00:35:35,760 --> 00:35:37,799
Speaker 4: And these are most of the guys who were litigating,

593
00:35:38,360 --> 00:35:41,200
Speaker 4: funding the lawsuits against the various actions that were taken

594
00:35:41,320 --> 00:35:44,480
Speaker 4: both to start the conservatorship and during the conservativeship, like

595
00:35:44,520 --> 00:35:48,160
Speaker 4: the profit sweep, and under that is the common stock,

596
00:35:48,200 --> 00:35:52,640
Speaker 4: but the common stock that trades only represents twenty percent

597
00:35:52,960 --> 00:35:56,120
Speaker 4: of the fully deluded equity because on top of the

598
00:35:56,160 --> 00:36:00,239
Speaker 4: senior preferred stock, the Treasury Department has a penny warrant

599
00:36:00,840 --> 00:36:03,800
Speaker 4: that can be exercised for one penny to buy seventy

600
00:36:03,880 --> 00:36:06,759
Speaker 4: nine percent of the stock of each entity. Okay, And

601
00:36:06,800 --> 00:36:09,600
Speaker 4: this is very similar actually to the way AIG was

602
00:36:09,640 --> 00:36:13,000
Speaker 4: set up. The tart money went in as senior preferred,

603
00:36:13,480 --> 00:36:17,600
Speaker 4: but we also had a warrant entitled the Treasury Department

604
00:36:17,600 --> 00:36:21,759
Speaker 4: to seventy nine percent of the stock. So today the

605
00:36:21,800 --> 00:36:24,799
Speaker 4: stock that trades really represents only twenty percent of the

606
00:36:24,800 --> 00:36:25,879
Speaker 4: total captainization.

607
00:36:25,960 --> 00:36:26,239
Speaker 1: Got it.

608
00:36:26,800 --> 00:36:29,920
Speaker 4: But still the equity account is teeny because why is

609
00:36:29,960 --> 00:36:32,960
Speaker 4: it teeny? Because you have that huge senior preferred stock

610
00:36:33,520 --> 00:36:36,600
Speaker 4: that sits above all of the junior preferred and the

611
00:36:36,640 --> 00:36:39,239
Speaker 4: senior preferred and the common Okay.

612
00:36:39,000 --> 00:36:42,240
Speaker 3: I'm going to resist the temptation to ask more questions

613
00:36:42,280 --> 00:36:44,920
Speaker 3: about the design of like the capital stack of some

614
00:36:45,000 --> 00:36:48,040
Speaker 3: of these things. But let's go back to the beginning

615
00:36:48,040 --> 00:36:52,120
Speaker 3: of this conversation about how do we increase housing supply

616
00:36:52,400 --> 00:36:55,040
Speaker 3: in the US. So we are already in a situation

617
00:36:55,200 --> 00:36:59,360
Speaker 3: where as you mentioned, nine of the twelve trillion I

618
00:36:59,400 --> 00:37:03,520
Speaker 3: think it was, mortgages outstanding in the US effectively reside

619
00:37:03,560 --> 00:37:07,480
Speaker 3: on the balance sheet of government sponsored entities. So what

620
00:37:07,760 --> 00:37:13,160
Speaker 3: more can these agencies do to support the housing market?

621
00:37:13,239 --> 00:37:14,759
Speaker 3: What more would you ask of them?

622
00:37:14,960 --> 00:37:18,320
Speaker 4: Yes? Well, all right, so let's begin with the limitation

623
00:37:18,440 --> 00:37:20,400
Speaker 4: under which they operate. So, in order to protect the

624
00:37:20,440 --> 00:37:25,040
Speaker 4: banking industry's franchise to make mortgages, to originate mortgages, these

625
00:37:25,200 --> 00:37:28,680
Speaker 4: entities are barred from being in the primary market. They

626
00:37:28,680 --> 00:37:33,000
Speaker 4: couldn't go out and start lending to developers directly. But

627
00:37:33,280 --> 00:37:36,160
Speaker 4: just as they do in the residential mortgage market and

628
00:37:36,200 --> 00:37:40,400
Speaker 4: as they do in the multifamily mortgage market, they could

629
00:37:40,719 --> 00:37:46,040
Speaker 4: create a secondary market for construction loans and thereby increase

630
00:37:46,120 --> 00:37:51,799
Speaker 4: liquidity in the construction finance market. And if you look

631
00:37:51,880 --> 00:37:56,400
Speaker 4: today at the real constraints on supply as a result

632
00:37:56,400 --> 00:37:59,560
Speaker 4: of the inflation problems we've had over the last couple

633
00:37:59,600 --> 00:38:04,000
Speaker 4: of years, and they fed interest rate hiking, the construction

634
00:38:04,120 --> 00:38:07,960
Speaker 4: finance has become incredibly expensive. But not only. The other

635
00:38:08,040 --> 00:38:11,759
Speaker 4: impact of high interest rates is that cap rates for

636
00:38:11,920 --> 00:38:15,239
Speaker 4: once a project is completed, because the financing costs are

637
00:38:15,239 --> 00:38:18,279
Speaker 4: so much more expensive, the projects have less value to

638
00:38:18,320 --> 00:38:21,480
Speaker 4: the equity owners, and so that market is almost frozen.

639
00:38:21,480 --> 00:38:24,800
Speaker 4: There's been a surge of multi family constructions post pandemic,

640
00:38:25,440 --> 00:38:28,480
Speaker 4: so in cities like Austin, rents are actually starting to

641
00:38:28,480 --> 00:38:31,080
Speaker 4: come down because there were so many people moving to

642
00:38:31,160 --> 00:38:36,040
Speaker 4: Austin and like communities that multifamily developers went in before

643
00:38:36,080 --> 00:38:39,560
Speaker 4: the interest rate hikes and started projects, And the supply

644
00:38:39,680 --> 00:38:43,320
Speaker 4: constraints in some markets are being eased by a surge

645
00:38:43,360 --> 00:38:48,080
Speaker 4: of multifamily construction. But that's not true in all markets.

646
00:38:48,160 --> 00:38:51,200
Speaker 4: There is real supply demand and balance, and the only

647
00:38:51,239 --> 00:38:54,920
Speaker 4: way depends on who you talk to, but there's a

648
00:38:55,080 --> 00:38:59,959
Speaker 4: shortage of supply of somewhere between a million to five

649
00:39:00,200 --> 00:39:04,640
Speaker 4: million units is the best estimates I've seen nationwide. So

650
00:39:04,920 --> 00:39:07,640
Speaker 4: you know that on the margin, right, when supply and

651
00:39:07,680 --> 00:39:10,960
Speaker 4: demand are out of balance like that, you get the

652
00:39:11,440 --> 00:39:14,799
Speaker 4: enormous house price and rent price increases. And that's what

653
00:39:14,840 --> 00:39:18,239
Speaker 4: we've seen over the last post pandemic period. There's been

654
00:39:18,320 --> 00:39:21,880
Speaker 4: a huge surge in house prices and huge surge and

655
00:39:21,960 --> 00:39:25,520
Speaker 4: rents because there's just more demand than there is supply

656
00:39:25,640 --> 00:39:28,640
Speaker 4: to meet it. So going back to what these entities

657
00:39:28,640 --> 00:39:31,560
Speaker 4: could do again, I want to just take one further

658
00:39:31,600 --> 00:39:34,520
Speaker 4: step back. Sure, what does a federal government do today

659
00:39:34,719 --> 00:39:37,880
Speaker 4: to try to augment the supply of housing. Well, they

660
00:39:37,920 --> 00:39:40,600
Speaker 4: have a bunch of demand side programs, which you would

661
00:39:40,600 --> 00:39:42,759
Speaker 4: say today are counterproductive. We've got more demand than we

662
00:39:42,800 --> 00:39:46,400
Speaker 4: can handle. But the government subsidizes demand in a variety

663
00:39:46,440 --> 00:39:50,320
Speaker 4: of ways, in part by making cheap mortgage credit widely

664
00:39:50,360 --> 00:39:54,600
Speaker 4: available through the government sponsored entities, and through programs for veterans,

665
00:39:54,600 --> 00:39:57,960
Speaker 4: and through programs for first time home buyers and lower

666
00:39:58,000 --> 00:40:02,400
Speaker 4: middle income persons. Through the FAJA and through a rental

667
00:40:02,480 --> 00:40:07,640
Speaker 4: voucher program administered by HUD. They also on the supply

668
00:40:07,800 --> 00:40:10,919
Speaker 4: side provide. There's a tax credit program, the Low Income

669
00:40:10,960 --> 00:40:14,720
Speaker 4: Housing Tax Credit Program, which is subject to annual appropriations

670
00:40:14,760 --> 00:40:18,160
Speaker 4: by Congress and is one of the most incredibly cumbersome

671
00:40:18,239 --> 00:40:22,520
Speaker 4: bureaucredit processes. To get your hands on these tax credits,

672
00:40:22,800 --> 00:40:27,080
Speaker 4: they get allocated by HUD to the state finance agencies.

673
00:40:27,160 --> 00:40:31,480
Speaker 4: The state finance agencies set up programs to qualify for

674
00:40:31,520 --> 00:40:35,160
Speaker 4: those tax credits for new projects. But if you have

675
00:40:35,320 --> 00:40:39,319
Speaker 4: the patients and the lawyers to do the paperwork, and

676
00:40:39,400 --> 00:40:42,279
Speaker 4: you can go through the competitive bidding process, you can

677
00:40:42,320 --> 00:40:45,480
Speaker 4: get a tax credit that can basically foot the bill

678
00:40:45,920 --> 00:40:49,520
Speaker 4: of new construction. About somewhere between twenty five to fifty

679
00:40:49,560 --> 00:40:52,120
Speaker 4: percent of the cost of new construction is basically being

680
00:40:52,239 --> 00:40:55,440
Speaker 4: subsidized through the tax code of the United States the

681
00:40:55,440 --> 00:40:59,680
Speaker 4: sale of tax credits. So a developer can build a project,

682
00:41:00,080 --> 00:41:02,120
Speaker 4: all the tax credits to somebody who needs them, and

683
00:41:02,680 --> 00:41:06,120
Speaker 4: offload about twenty to fifty percent of the construction costs.

684
00:41:06,680 --> 00:41:09,000
Speaker 4: But that's it. That's what the federal government does today.

685
00:41:10,360 --> 00:41:13,799
Speaker 4: I think a much more efficient way would be to

686
00:41:13,880 --> 00:41:17,440
Speaker 4: create a new finance program somewhere in the federal government

687
00:41:17,640 --> 00:41:21,040
Speaker 4: to provide mezzanine financing. Then how could we do this

688
00:41:21,520 --> 00:41:25,200
Speaker 4: and why mezzanine financing? Right, So, if you want to

689
00:41:25,200 --> 00:41:28,000
Speaker 4: build a new apartment building, or you want to build

690
00:41:28,320 --> 00:41:32,319
Speaker 4: a house, if you put up forty percent, you as

691
00:41:32,360 --> 00:41:35,360
Speaker 4: the builder or developer, put up forty percent of the

692
00:41:35,400 --> 00:41:38,080
Speaker 4: construction cost. You can get a loan for sixty percent

693
00:41:38,120 --> 00:41:41,480
Speaker 4: of the construction costs from a bank, so your equity

694
00:41:41,520 --> 00:41:45,120
Speaker 4: is levered one and a half to one sixty forty.

695
00:41:46,040 --> 00:41:49,839
Speaker 4: If the government were to provide twenty percent of the

696
00:41:49,880 --> 00:41:53,080
Speaker 4: construction cost and a mezzanine financing, so you could still

697
00:41:53,120 --> 00:41:56,040
Speaker 4: get sixty percent senior debt because the mezzanine would be

698
00:41:56,080 --> 00:41:59,319
Speaker 4: expressly subordinated. It's the equivalent of equity from a senior

699
00:41:59,400 --> 00:42:03,560
Speaker 4: lenders born in view. But now the equity holder, the developer,

700
00:42:03,600 --> 00:42:05,680
Speaker 4: only has to put up twenty percent. It's like a

701
00:42:05,719 --> 00:42:08,879
Speaker 4: conventional mortgage. Right, you put twenty percent down, you get

702
00:42:09,320 --> 00:42:12,840
Speaker 4: an eighty percent loan. So here the government could actually

703
00:42:13,160 --> 00:42:20,360
Speaker 4: expand financing for new construction and thereby lever the equity

704
00:42:20,520 --> 00:42:23,719
Speaker 4: of the developer for to one rather than traditionally one

705
00:42:23,760 --> 00:42:26,200
Speaker 4: and a half to one, and if the government were

706
00:42:26,239 --> 00:42:30,440
Speaker 4: to pass on its own relatively cheap borrowing costs as

707
00:42:30,440 --> 00:42:34,319
Speaker 4: opposed to what the market would charge for mezzanine financing,

708
00:42:35,040 --> 00:42:39,960
Speaker 4: the developers and we've done this math, could build affordable housing,

709
00:42:40,000 --> 00:42:43,320
Speaker 4: you know what qualifies as affordable housing and still earn

710
00:42:43,880 --> 00:42:47,000
Speaker 4: the same kinds of return on equity that they earn

711
00:42:47,120 --> 00:42:50,520
Speaker 4: from market rate housing. So it would create a massive

712
00:42:50,560 --> 00:42:54,680
Speaker 4: incentive to build new supply for where it's really needed.

713
00:42:55,200 --> 00:42:59,000
Speaker 2: Let's hear the math both in terms of why affordable

714
00:42:59,040 --> 00:43:03,200
Speaker 2: housing be comes more profitable under this, and then also

715
00:43:03,280 --> 00:43:05,640
Speaker 2: the math of like how many units we're talking about

716
00:43:05,680 --> 00:43:07,200
Speaker 2: potentially this could unlock.

717
00:43:07,360 --> 00:43:10,239
Speaker 4: Yeah, so this is you know, private equity guys who

718
00:43:10,280 --> 00:43:13,560
Speaker 4: listen to you will understand. Gals will understand this. Right,

719
00:43:13,600 --> 00:43:17,719
Speaker 4: So if you're levering your equity four times, yeah, you

720
00:43:17,800 --> 00:43:22,280
Speaker 4: can effectively earn the same rate of return building lower

721
00:43:22,280 --> 00:43:22,960
Speaker 4: priced units.

722
00:43:23,040 --> 00:43:23,600
Speaker 2: It makes sense.

723
00:43:23,640 --> 00:43:27,240
Speaker 4: I mean, the math is pretty straightforward. And I tested

724
00:43:27,239 --> 00:43:30,440
Speaker 4: this out with a variety of multifamily developers directly and

725
00:43:30,560 --> 00:43:33,040
Speaker 4: just said, hey, you know, if the government had a

726
00:43:33,080 --> 00:43:37,400
Speaker 4: mezzanine financing program, could you build to eighty percent ami

727
00:43:37,440 --> 00:43:43,440
Speaker 4: average median income? What's affordable in government parlance, is someone

728
00:43:43,560 --> 00:43:49,520
Speaker 4: earning eighty percent of area median income if their rent

729
00:43:49,840 --> 00:43:57,840
Speaker 4: cost is only thirty percent or less of that, right, AMI,

730
00:43:58,440 --> 00:44:01,920
Speaker 4: that's affordable. And so we tested this with a series

731
00:44:01,960 --> 00:44:04,719
Speaker 4: of the large multi family developers, and you know that

732
00:44:04,960 --> 00:44:06,839
Speaker 4: they're if they could lever their equity four to one

733
00:44:06,920 --> 00:44:10,760
Speaker 4: with cheap mezzanine financing, they could build to those metrics.

734
00:44:11,840 --> 00:44:13,799
Speaker 4: I want to give you some more numbers, system.

735
00:44:13,600 --> 00:44:15,040
Speaker 2: No, I love it. We're here for numbers.

736
00:44:15,080 --> 00:44:19,799
Speaker 4: Yeah, yeah, just to impress upon you how small. The

737
00:44:19,840 --> 00:44:23,480
Speaker 4: federal government's role in housing other than through the mortgage

738
00:44:23,520 --> 00:44:28,719
Speaker 4: markets is HUD, the Housing and Urban Development Agency, which

739
00:44:28,800 --> 00:44:33,120
Speaker 4: was created in nineteen seventy four to deal with urban

740
00:44:33,200 --> 00:44:37,239
Speaker 4: renewal because the inner cities were falling down in the

741
00:44:37,320 --> 00:44:44,920
Speaker 4: nineteen sixties. It's total budget today for new housing, for playgrounds,

742
00:44:44,960 --> 00:44:48,960
Speaker 4: for urban renewal. Its total budgets is about four billion dollars.

743
00:44:49,680 --> 00:44:53,240
Speaker 4: The military budget, just by contrast, is eight hundred billion dollars.

744
00:44:53,800 --> 00:44:56,880
Speaker 4: So we're investing eight hundred billion dollars in our national

745
00:44:56,880 --> 00:45:01,120
Speaker 4: defense and four billion dollars in housing an urban renewal.

746
00:45:01,080 --> 00:45:03,520
Speaker 4: And now we are also have the tax credit program,

747
00:45:03,880 --> 00:45:07,239
Speaker 4: and the tax credit program is responsible for building about

748
00:45:07,239 --> 00:45:11,120
Speaker 4: one hundred and ten thousand new units a year, which

749
00:45:11,200 --> 00:45:16,239
Speaker 4: is big. But if we have a five million unit shortfall,

750
00:45:17,400 --> 00:45:20,279
Speaker 4: if that alone is not going to fill that shortfall,

751
00:45:20,360 --> 00:45:23,000
Speaker 4: to take you fifty years to fill that shortfall at

752
00:45:23,000 --> 00:45:28,280
Speaker 4: that level of subsidy, a mezzanine financing program put aside

753
00:45:28,280 --> 00:45:31,080
Speaker 4: for the moment where we would do that. Who could

754
00:45:31,080 --> 00:45:35,920
Speaker 4: do it? A mezzanine financing program, which would be basically

755
00:45:35,920 --> 00:45:39,320
Speaker 4: a revolving loan program, right, because we're talking about construction finance,

756
00:45:39,360 --> 00:45:43,440
Speaker 4: that would be taken out the way construction is done. Right,

757
00:45:43,640 --> 00:45:47,040
Speaker 4: get you finance the construction. As soon as the construction's done,

758
00:45:47,200 --> 00:45:49,719
Speaker 4: the buildings leased up, you get takeout financing because you

759
00:45:49,760 --> 00:45:52,479
Speaker 4: now have a stable set of cash flows from rent

760
00:45:52,520 --> 00:45:54,880
Speaker 4: payments coming in on the property. And therefore a different

761
00:45:54,880 --> 00:45:58,040
Speaker 4: set of lenders will give you longer term financing, including

762
00:45:58,080 --> 00:46:02,040
Speaker 4: Fanny and Freddy who do take out financing for new construction.

763
00:46:02,680 --> 00:46:04,880
Speaker 4: So if there were a mezzanine lending program at the

764
00:46:04,880 --> 00:46:09,560
Speaker 4: federal level, generally it's three to five years from permitting

765
00:46:09,640 --> 00:46:13,680
Speaker 4: to completion on a new apartment development of any size,

766
00:46:14,280 --> 00:46:17,600
Speaker 4: so that mezzanine loan would get taken out and could

767
00:46:17,640 --> 00:46:20,160
Speaker 4: go right back and do it again. It'd be a

768
00:46:20,320 --> 00:46:23,520
Speaker 4: revolving loan program. So it's a it's not a one off,

769
00:46:23,560 --> 00:46:26,279
Speaker 4: it's not a one off, and it's also not a

770
00:46:26,320 --> 00:46:29,240
Speaker 4: continuing hit to the federal budget. So from a deficit

771
00:46:29,360 --> 00:46:33,080
Speaker 4: point of view, this is a one time capitalization and

772
00:46:33,200 --> 00:46:35,680
Speaker 4: you've done, and now you have a program, depending on

773
00:46:35,719 --> 00:46:40,000
Speaker 4: its size, that can make a major impact on new

774
00:46:40,040 --> 00:46:44,560
Speaker 4: supply of new housing. So just to size it, if

775
00:46:44,760 --> 00:46:50,279
Speaker 4: there were one hundred billion dollars of mezzanine lending authority,

776
00:46:50,960 --> 00:46:54,560
Speaker 4: and so twenty billion dollars a year, because it takes

777
00:46:54,600 --> 00:46:57,080
Speaker 4: five years from permitting to construction, so we'd put out

778
00:46:57,120 --> 00:47:00,319
Speaker 4: twenty billion a year in effect in a revolving So

779
00:47:00,400 --> 00:47:02,919
Speaker 4: in year six you get the year one loan paid back.

780
00:47:03,000 --> 00:47:05,360
Speaker 4: You put it back to work in year six, so

781
00:47:05,480 --> 00:47:08,479
Speaker 4: twenty billion a year, and that twenty billion is twenty

782
00:47:08,560 --> 00:47:13,400
Speaker 4: percent of the total construction cost. So you're now facilitating

783
00:47:13,480 --> 00:47:16,960
Speaker 4: or turbot charging one hundred billion dollars of new construction

784
00:47:17,040 --> 00:47:19,840
Speaker 4: a year. One hundred billion dollars of new construction a

785
00:47:19,920 --> 00:47:22,480
Speaker 4: year would get you two hundred and fifty to four

786
00:47:22,560 --> 00:47:27,160
Speaker 4: hundred thousand new units a year, which means that one

787
00:47:27,200 --> 00:47:31,240
Speaker 4: to five million dollar housing shortfall unit shortfall could be

788
00:47:31,440 --> 00:47:33,880
Speaker 4: filled over the five year period.

789
00:47:34,880 --> 00:47:38,960
Speaker 3: So just on this point, I'm sold. Okay, wait, I'm

790
00:47:38,960 --> 00:47:41,480
Speaker 3: going to ask all the Devil's advocate questions then, So

791
00:47:41,560 --> 00:47:45,360
Speaker 3: I understand the role of leverage in this. However, given

792
00:47:45,880 --> 00:47:48,160
Speaker 3: the history of two thousand and eight, I think people

793
00:47:48,200 --> 00:47:51,040
Speaker 3: here leverage in the housing market and maybe start to

794
00:47:51,040 --> 00:47:55,600
Speaker 3: get a little bit nervous. How risky are those construction

795
00:47:55,840 --> 00:47:59,080
Speaker 3: loans because I assume, you know, in twenty twenty three,

796
00:47:59,120 --> 00:48:01,320
Speaker 3: I think there was a drop of like forty percent

797
00:48:01,520 --> 00:48:05,960
Speaker 3: in construction financing. I assume there's a reason for that,

798
00:48:06,000 --> 00:48:09,640
Speaker 3: and it's either, you know, banks being reticent to extend

799
00:48:09,680 --> 00:48:13,000
Speaker 3: this type of credit, or maybe they're constrained by higher

800
00:48:13,000 --> 00:48:17,000
Speaker 3: capital charges around this particular issue, or maybe it's simply

801
00:48:17,040 --> 00:48:20,640
Speaker 3: that with the interest rate uncertainty, the numbers don't pencil out,

802
00:48:20,680 --> 00:48:23,560
Speaker 3: and so it's not that the loans themselves are inherently risky.

803
00:48:24,080 --> 00:48:27,480
Speaker 3: It's the idea that the US government could effectively hold

804
00:48:27,520 --> 00:48:30,040
Speaker 3: them through the cycle of interest rates. But can you

805
00:48:30,080 --> 00:48:32,919
Speaker 3: talk a little bit more about what risk the US

806
00:48:33,000 --> 00:48:35,640
Speaker 3: government would be taking on its balance sheet if we

807
00:48:35,640 --> 00:48:36,239
Speaker 3: were to do this.

808
00:48:36,760 --> 00:48:40,239
Speaker 4: Yeah. So the way I look at this is, if

809
00:48:40,280 --> 00:48:45,040
Speaker 4: the standards that Fanny and Freddy now operate under for

810
00:48:45,200 --> 00:48:49,640
Speaker 4: their mortgage purchases, right, they buy mortgages from banks, Those

811
00:48:49,640 --> 00:48:54,160
Speaker 4: mortgages have to meet certain basic criteria both in terms

812
00:48:54,200 --> 00:48:57,640
Speaker 4: of the DTIs of the borrower, the debt service to

813
00:48:57,640 --> 00:49:01,960
Speaker 4: total income of the borrower that the mortgage represents, and

814
00:49:02,120 --> 00:49:06,479
Speaker 4: the loan to value. So Fanny and Freddy can't buy

815
00:49:06,520 --> 00:49:09,799
Speaker 4: a mortgage that has a loan to value higher than

816
00:49:09,880 --> 00:49:12,520
Speaker 4: eighty percent, Right, So you've got to put as a

817
00:49:12,520 --> 00:49:14,840
Speaker 4: new home buyer, you got to put twenty percent down

818
00:49:15,239 --> 00:49:17,400
Speaker 4: in order to get a mortgage that ultimately ends up

819
00:49:17,400 --> 00:49:20,680
Speaker 4: on Fanny and Freddy's books. Now there's some exceptions to that,

820
00:49:21,200 --> 00:49:24,440
Speaker 4: but ninety five percent of the mortgage credit that's on

821
00:49:24,480 --> 00:49:27,440
Speaker 4: their books is on that basis of twenty percent equity

822
00:49:27,560 --> 00:49:32,200
Speaker 4: eighty percent down. Their history over their lives on those

823
00:49:32,320 --> 00:49:36,719
Speaker 4: kinds of mortgages, in terms of credit, losses are negligible.

824
00:49:37,360 --> 00:49:40,640
Speaker 4: Obviously in the cycle, you know, in a massive downturn

825
00:49:40,760 --> 00:49:42,799
Speaker 4: like we had in two thousand and eight, you're going

826
00:49:42,880 --> 00:49:45,840
Speaker 4: to have you know, a higher rate of delinquency and default.

827
00:49:46,360 --> 00:49:49,840
Speaker 3: But no, I think even in two thousand and eight, multifamily.

828
00:49:49,520 --> 00:49:53,680
Speaker 4: Yeah, the multi family books was fine, was fine. So generally,

829
00:49:53,719 --> 00:49:57,560
Speaker 4: as long as we have a growing population, you're going

830
00:49:57,640 --> 00:50:00,560
Speaker 4: to have increased demand for housing, right, I mean, if

831
00:50:00,560 --> 00:50:03,880
Speaker 4: the population started to strengthen, the holder of a construction

832
00:50:04,000 --> 00:50:06,560
Speaker 4: loan on the other end of that five year construction

833
00:50:06,719 --> 00:50:10,839
Speaker 4: period might face a market that's very soft. But we

834
00:50:10,960 --> 00:50:15,160
Speaker 4: have a growing population. Even though you know, we're only

835
00:50:15,200 --> 00:50:18,400
Speaker 4: adding half a million people a year by way of birth,

836
00:50:18,520 --> 00:50:21,640
Speaker 4: We're you know, adding a couple of million people a

837
00:50:21,719 --> 00:50:26,120
Speaker 4: year by way of immigration, legal and illegal. But nonetheless

838
00:50:26,360 --> 00:50:28,680
Speaker 4: we have a growing population, and therefore you could expect

839
00:50:28,719 --> 00:50:31,840
Speaker 4: the housing market it'll have ups and downs based on

840
00:50:32,040 --> 00:50:35,360
Speaker 4: you know, interest rates and the like. And location. Location,

841
00:50:35,480 --> 00:50:39,960
Speaker 4: location is important for housing always. But I think with

842
00:50:40,120 --> 00:50:45,440
Speaker 4: twenty percent equity underneath the government, the risk of you know,

843
00:50:45,480 --> 00:50:48,000
Speaker 4: a mezzanine lending program are very manageable.

844
00:50:48,320 --> 00:50:50,760
Speaker 3: Why don't banks do more construction loans?

845
00:50:51,040 --> 00:50:53,960
Speaker 4: They do, but they do it only up to sixty percent.

846
00:50:54,200 --> 00:50:57,560
Speaker 4: There is a mezzanine market, but the mezzanine market is

847
00:50:57,600 --> 00:51:02,200
Speaker 4: expensive and liquidity constrained. And get another five percent of

848
00:51:02,239 --> 00:51:05,240
Speaker 4: your construction costs, but that's going to cost you twelve

849
00:51:05,280 --> 00:51:08,200
Speaker 4: to eighteen percent, and that's eating into the equity holder's

850
00:51:08,560 --> 00:51:09,240
Speaker 4: rates of return.

851
00:51:09,960 --> 00:51:12,800
Speaker 2: So we already know that there are all kinds of

852
00:51:12,880 --> 00:51:15,960
Speaker 2: legal fights going on with the Fanny and Freddy already,

853
00:51:16,080 --> 00:51:21,040
Speaker 2: and you're sort of introducing a new market for them

854
00:51:21,280 --> 00:51:24,600
Speaker 2: or your idea that has never existed. So there are

855
00:51:24,640 --> 00:51:28,560
Speaker 2: sort of two things. One, you mentioned that in residential mortgages,

856
00:51:28,880 --> 00:51:31,279
Speaker 2: you know, they don't go out and extend alone. They

857
00:51:31,280 --> 00:51:33,360
Speaker 2: buy a loan from a bank. Yeah, and so it

858
00:51:33,440 --> 00:51:37,799
Speaker 2: sounds like that in this case. So a they're entering

859
00:51:37,800 --> 00:51:39,719
Speaker 2: a new space, or they would be entering a new

860
00:51:39,719 --> 00:51:43,680
Speaker 2: space mezzanine lending for multifamily, and it sounds like there

861
00:51:43,680 --> 00:51:45,000
Speaker 2: would be a direct interface.

862
00:51:45,400 --> 00:51:49,960
Speaker 4: No, they're charters, those federal charters that created the implied guarantee.

863
00:51:50,719 --> 00:51:53,560
Speaker 4: Those federal charters prohibit them from so they would be entering. Okay,

864
00:51:53,640 --> 00:51:56,399
Speaker 4: so it have to be a secondary market, got it right.

865
00:51:56,440 --> 00:51:59,239
Speaker 4: But if I'm JP Morgan, Yeah, and I know I

866
00:51:59,280 --> 00:52:03,080
Speaker 4: can dump this mezzanine loan that I wrote to Fanny

867
00:52:03,160 --> 00:52:06,640
Speaker 4: May as long as it meets Fanny May's criteria. I

868
00:52:06,680 --> 00:52:09,879
Speaker 4: can sell it immediately to Fanny may delf Spread Dell

869
00:52:10,080 --> 00:52:10,799
Speaker 4: write that loan.

870
00:52:10,960 --> 00:52:13,960
Speaker 2: I have to imagine there are other legal questions, and

871
00:52:14,160 --> 00:52:16,400
Speaker 2: you mentioned your lawyer, but you know you can always

872
00:52:16,400 --> 00:52:20,480
Speaker 2: get multiple opinions from multiple lawyers. So when you are

873
00:52:20,600 --> 00:52:25,400
Speaker 2: talking about these ideas, are there any concerns about is

874
00:52:25,440 --> 00:52:26,360
Speaker 2: this actually allowed?

875
00:52:26,600 --> 00:52:31,080
Speaker 4: Yeah, so let's talk about the necessary steps. Okay, Right today,

876
00:52:31,160 --> 00:52:34,600
Speaker 4: they don't do construction lending, so the capital rule that

877
00:52:34,719 --> 00:52:37,880
Speaker 4: was developed for them during conservatorship does not address what

878
00:52:37,920 --> 00:52:41,520
Speaker 4: the capital charge for a construction loan would be, particularly

879
00:52:41,560 --> 00:52:45,080
Speaker 4: a mezzanine construction loan, So that would have to be

880
00:52:45,239 --> 00:52:49,600
Speaker 4: developed and promulgated and passed by the regulator. It'll take

881
00:52:49,640 --> 00:52:52,960
Speaker 4: a little time, but it's not rocket science because banks

882
00:52:52,960 --> 00:52:55,480
Speaker 4: do construction lending, and there's a bank capital rule for

883
00:52:55,560 --> 00:52:59,200
Speaker 4: construction lending that the regulator for Fanny and Freddy could

884
00:52:59,239 --> 00:53:02,240
Speaker 4: borrow from and use as a model and a precedent,

885
00:53:02,680 --> 00:53:05,160
Speaker 4: but nonetheless a capital rule would have to be created.

886
00:53:05,600 --> 00:53:08,120
Speaker 4: I think there's very little question whether Fanny could create

887
00:53:08,120 --> 00:53:11,600
Speaker 4: a secondary market and construction loans, because in fact, they

888
00:53:11,600 --> 00:53:14,799
Speaker 4: did some of that back in the nineteen eighties. So

889
00:53:14,880 --> 00:53:18,840
Speaker 4: there's actual precedent for them in construction loans. In the

890
00:53:18,840 --> 00:53:23,000
Speaker 4: case of Freddie, there's probably a better argument that you know,

891
00:53:23,040 --> 00:53:26,480
Speaker 4: a more conservative lawyer than me who's really being an

892
00:53:26,480 --> 00:53:29,840
Speaker 4: advocate on this, might say that Freddie might be constrained

893
00:53:29,840 --> 00:53:33,520
Speaker 4: and doing construction lending on a secondary market basis. But

894
00:53:33,680 --> 00:53:35,960
Speaker 4: the truth is that, you know, the Congress of the

895
00:53:36,080 --> 00:53:42,880
Speaker 4: United States recognizes it broadly. There's bipartisan recognition that we

896
00:53:43,000 --> 00:53:45,160
Speaker 4: got a housing supply problem in the United States. So

897
00:53:45,880 --> 00:53:49,040
Speaker 4: even if you don't use Fanny and Freddie's vehicles, you know,

898
00:53:49,120 --> 00:53:50,879
Speaker 4: the hardest thing in America to do today is get

899
00:53:50,880 --> 00:53:52,960
Speaker 4: a piece of legislation pass. So I'm not you know

900
00:53:53,040 --> 00:53:56,560
Speaker 4: of some wild eyed optimist about the ability to create

901
00:53:56,640 --> 00:54:00,600
Speaker 4: a new federal financing bank to do this. But the

902
00:54:00,800 --> 00:54:04,360
Speaker 4: problem on housing is so great, and it's so widespread

903
00:54:04,360 --> 00:54:06,960
Speaker 4: across red states and blue states and purple states alike,

904
00:54:07,360 --> 00:54:11,480
Speaker 4: rural communities and cities alike, that I actually think if

905
00:54:11,480 --> 00:54:14,439
Speaker 4: you went to the Congress and said, hey, guys, let's

906
00:54:14,520 --> 00:54:17,600
Speaker 4: start small and see if it works. Let's start fifty

907
00:54:17,640 --> 00:54:22,040
Speaker 4: billion and against a seven trillion dollar budget, could they

908
00:54:22,120 --> 00:54:25,840
Speaker 4: not find fifty billion dollars to augment housing supply in America.

909
00:54:25,960 --> 00:54:28,080
Speaker 4: I think they're probably could I think.

910
00:54:27,920 --> 00:54:31,440
Speaker 3: You possibly anticipated my next question with the wild eyed

911
00:54:31,600 --> 00:54:35,400
Speaker 3: optimist comment just then, But why do we have to

912
00:54:35,440 --> 00:54:39,480
Speaker 3: make it so complicated? So there are restrictions on the

913
00:54:39,520 --> 00:54:44,120
Speaker 3: gsees doing direct flending into the mortgage market, but what

914
00:54:44,160 --> 00:54:49,040
Speaker 3: they're effectively doing is using their balance sheet and their

915
00:54:49,120 --> 00:54:52,600
Speaker 3: credit rating, and their association with the US government and

916
00:54:52,680 --> 00:54:58,560
Speaker 3: their subsequent cheap capital costs to subsidize these mortgages effectively.

917
00:54:58,800 --> 00:55:01,800
Speaker 3: So why not just go whole and have them extend

918
00:55:01,800 --> 00:55:02,680
Speaker 3: the finance.

919
00:55:02,360 --> 00:55:05,560
Speaker 4: Tracy, I'm with you. I'll bring you to the next

920
00:55:05,600 --> 00:55:06,560
Speaker 4: meeting down with Dacy.

921
00:55:07,560 --> 00:55:09,000
Speaker 3: It's just politically infeasible.

922
00:55:09,080 --> 00:55:11,279
Speaker 4: No, no, it's not. I think it's well. First of all,

923
00:55:11,320 --> 00:55:13,200
Speaker 4: this idea is getting traction at the state level, right

924
00:55:13,239 --> 00:55:16,200
Speaker 4: the number of the state housing finance agencies are starting

925
00:55:16,239 --> 00:55:19,799
Speaker 4: to do this, recognizing the constraints on developers.

926
00:55:19,920 --> 00:55:22,120
Speaker 2: We did an episode about the Montgomery County.

927
00:55:22,000 --> 00:55:27,960
Speaker 4: Exactly, and the Massachusetts Housing Finance Agency is now gotten

928
00:55:28,040 --> 00:55:31,200
Speaker 4: authority from the Massachusetts legislature to do some of this

929
00:55:31,360 --> 00:55:34,960
Speaker 4: lending as well. So this is catching on. I mean, people,

930
00:55:35,080 --> 00:55:38,160
Speaker 4: this isn't you know, I didn't invent this. There are

931
00:55:38,160 --> 00:55:41,360
Speaker 4: a variety of people who have thought this mezzany lending

932
00:55:41,400 --> 00:55:45,560
Speaker 4: by state or federal agencies could help lever developer equity

933
00:55:45,640 --> 00:55:48,600
Speaker 4: and augment the supply or turbertize the supply of new housing.

934
00:55:49,280 --> 00:55:51,400
Speaker 4: But I think even at the federal level this is

935
00:55:51,480 --> 00:55:55,880
Speaker 4: getting some interest. The problem is we're an election season, right,

936
00:55:56,360 --> 00:56:00,759
Speaker 4: and try as we might get new initiatives passed by

937
00:56:00,800 --> 00:56:04,360
Speaker 4: an existing administration. You know, they're a little diverted on

938
00:56:04,640 --> 00:56:05,560
Speaker 4: getting re elected.

939
00:56:05,680 --> 00:56:07,799
Speaker 2: Hey, have all this stuff going on. So, just to

940
00:56:07,840 --> 00:56:11,600
Speaker 2: be clear than on this, right, there are theoretically multiple

941
00:56:11,680 --> 00:56:15,400
Speaker 2: ways that the US government could use its borrowing authority

942
00:56:15,440 --> 00:56:20,080
Speaker 2: or its lending capacity to facilitate this. It doesn't necessarily

943
00:56:20,120 --> 00:56:22,080
Speaker 2: have to be through Fanny and Freddy. But if it

944
00:56:22,120 --> 00:56:26,319
Speaker 2: were through Fanny and Freddy, would that require legislation or

945
00:56:26,320 --> 00:56:28,640
Speaker 2: who so, why don't you walk us through that component?

946
00:56:28,760 --> 00:56:29,000
Speaker 4: Yeah?

947
00:56:29,000 --> 00:56:31,719
Speaker 2: So would have to make a decision, And how would

948
00:56:31,719 --> 00:56:34,840
Speaker 2: they go about making the decision where these existing banks,

949
00:56:34,920 --> 00:56:37,560
Speaker 2: under their existing rules now enter a new market.

950
00:56:37,760 --> 00:56:43,799
Speaker 4: Yeah? So in conservatorship, Yeah, Fanny and Freddy are effectively

951
00:56:44,520 --> 00:56:48,560
Speaker 4: there's joint control over them by their conservator, the Federal

952
00:56:48,600 --> 00:56:52,000
Speaker 4: Housing Finance Agency for the person of the executive director

953
00:56:52,040 --> 00:56:55,200
Speaker 4: of that agency and by the Treasury Department, because the

954
00:56:55,239 --> 00:56:58,120
Speaker 4: Treasury Department has one hundred and ninety two billion dollars

955
00:56:58,160 --> 00:57:00,880
Speaker 4: into them and a senior preferred stock that has a

956
00:57:00,960 --> 00:57:05,319
Speaker 4: series of covenants. So both the Treasury Department and the

957
00:57:05,400 --> 00:57:09,360
Speaker 4: FHFA would have to authorize this. The FHFA would have

958
00:57:09,360 --> 00:57:13,200
Speaker 4: to create a capital rule for construction lending, and the

959
00:57:13,239 --> 00:57:17,040
Speaker 4: Treasury Department would have to consent to the use of

960
00:57:17,160 --> 00:57:21,480
Speaker 4: their borrowing capacity, their ability to create a portfolio of loans.

961
00:57:21,800 --> 00:57:26,120
Speaker 4: Would have to consent to them building a portfolio of

962
00:57:26,520 --> 00:57:31,000
Speaker 4: mezzanine construction loans. But the Congress has nothing to say.

963
00:57:31,360 --> 00:57:33,520
Speaker 4: I mean, they could intervene if they thought this was

964
00:57:33,560 --> 00:57:35,760
Speaker 4: a stupid idea or they wanted to do it separately

965
00:57:35,800 --> 00:57:38,440
Speaker 4: away from Fanny and Freddy. But as I said, but

966
00:57:38,440 --> 00:57:42,080
Speaker 4: they are not necessary, they are not for this. Yeah,

967
00:57:42,120 --> 00:57:44,720
Speaker 4: So this is so. When HERA was passed in two

968
00:57:44,720 --> 00:57:47,960
Speaker 4: thousand and eight, it created authority to create the conservatorships

969
00:57:48,280 --> 00:57:51,680
Speaker 4: and end the conservatorships. You know, the purpose of the

970
00:57:51,720 --> 00:57:55,360
Speaker 4: conservator ships was to restore the safety and soundness of

971
00:57:55,440 --> 00:57:59,240
Speaker 4: the entities, and the safety and soundness of these entities

972
00:57:59,280 --> 00:58:03,080
Speaker 4: has been restored. They need more capital to meet the

973
00:58:03,120 --> 00:58:05,520
Speaker 4: needs of their capital rule. But they could raise that

974
00:58:05,560 --> 00:58:08,040
Speaker 4: capital as they were doing now by retaining their earnings

975
00:58:08,040 --> 00:58:12,120
Speaker 4: which are substantial, and building more capital. They could raise

976
00:58:12,160 --> 00:58:16,320
Speaker 4: that capital by accessing the public markets and doing reipos

977
00:58:17,000 --> 00:58:21,960
Speaker 4: if they were released from conservatorship. Congress is an unnecessary party.

978
00:58:21,840 --> 00:58:26,760
Speaker 4: The Congress has already authorized the release from conservatorship, subject

979
00:58:26,840 --> 00:58:29,480
Speaker 4: to meeting the standards that Congress laid out in two

980
00:58:29,560 --> 00:58:32,480
Speaker 4: thousand and eight, and with regard to the creation of

981
00:58:32,520 --> 00:58:35,040
Speaker 4: a new product, which is what this would be for

982
00:58:35,080 --> 00:58:38,400
Speaker 4: the two entities to create a secondary market in mezzanine lending.

983
00:58:39,040 --> 00:58:42,760
Speaker 4: That doesn't require Congress. That requires the authorization of the

984
00:58:42,760 --> 00:58:45,840
Speaker 4: Treasury Department to permit their portfolio to be used for

985
00:58:45,880 --> 00:58:50,920
Speaker 4: this purpose, and the FHFA as conservator and as regulator.

986
00:58:51,320 --> 00:58:53,040
Speaker 4: So this is something that could be done by so

987
00:58:53,120 --> 00:58:54,520
Speaker 4: called administrative action.

988
00:58:55,200 --> 00:58:58,080
Speaker 2: We don't know who's going to win in November, and

989
00:58:58,240 --> 00:59:01,880
Speaker 2: you mentioned that when Trump was the president, before Minuchin

990
00:59:01,960 --> 00:59:05,600
Speaker 2: had started to make some steps, including ending the SWEEP

991
00:59:06,120 --> 00:59:10,120
Speaker 2: to recapitalize it and essentially make it a properly for

992
00:59:10,200 --> 00:59:13,040
Speaker 2: profit entity. Again, if that were to happen at some

993
00:59:13,080 --> 00:59:17,400
Speaker 2: point under a theoretical second Trump administration, would that preclude

994
00:59:18,040 --> 00:59:21,640
Speaker 2: this avenue or there would be no constraint this under

995
00:59:21,680 --> 00:59:23,959
Speaker 2: a different Yeah, it doesn't have to be under conservatorship

996
00:59:24,000 --> 00:59:24,640
Speaker 2: for this to happen.

997
00:59:24,880 --> 00:59:27,880
Speaker 4: This could be done under conservatorship by administrative action and

998
00:59:27,920 --> 00:59:30,680
Speaker 4: the cooperation between Treasuring and the FHIFA. It could also

999
00:59:30,800 --> 00:59:35,760
Speaker 4: be done post conservatorship. If the capital rule permits it,

1000
00:59:36,440 --> 00:59:39,480
Speaker 4: the regulator then not the conservator were to permit it, okay.

1001
00:59:39,720 --> 00:59:42,440
Speaker 4: And you know, it seems based on what I've heard

1002
00:59:42,640 --> 00:59:46,200
Speaker 4: about what the second Trump administration would do, I think

1003
00:59:46,360 --> 00:59:49,720
Speaker 4: ending the Conservative ships is something that a new Trump

1004
00:59:49,760 --> 00:59:55,120
Speaker 4: administration would pursue. Trump actually submitted after in one of

1005
00:59:55,160 --> 00:59:57,720
Speaker 4: the litigations, he submitted an affidavit saying I would have

1006
00:59:57,720 --> 01:00:00,240
Speaker 4: done this had I, you know, not run out of time.

1007
01:00:01,000 --> 01:00:05,040
Speaker 4: And you know, the Biden administration, We've had sixteen years

1008
01:00:05,040 --> 01:00:08,920
Speaker 4: of conservatorships, twelve of them have been under democratic administrations.

1009
01:00:09,000 --> 01:00:14,280
Speaker 4: The Democrats haven't shown a real appetite to end the conservatorships.

1010
01:00:14,360 --> 01:00:17,520
Speaker 4: That seems to me the policy crowd around the Democrats

1011
01:00:17,560 --> 01:00:21,960
Speaker 4: seem to, you know, like having these as direct instruments

1012
01:00:21,960 --> 01:00:25,360
Speaker 4: of policy and under the thumb of the Executive Director

1013
01:00:25,400 --> 01:00:29,320
Speaker 4: and the Treasury Department. But I think even the group

1014
01:00:29,360 --> 01:00:33,400
Speaker 4: of policy advisors around the Democrats and the housing finance

1015
01:00:33,520 --> 01:00:37,200
Speaker 4: policy complex, I think even they're coming to recognize that

1016
01:00:37,240 --> 01:00:41,080
Speaker 4: a permanent conservatorship, which is kind of a limbo state,

1017
01:00:42,000 --> 01:00:45,480
Speaker 4: is really not ideal, and that I think there's a

1018
01:00:45,520 --> 01:00:49,320
Speaker 4: growing momentum to figure out how to end the conservatorships

1019
01:00:49,360 --> 01:00:52,720
Speaker 4: and that these companies recapitalize and have, you know, more

1020
01:00:52,760 --> 01:00:56,280
Speaker 4: normal corporate governance and a more normal relationship as a

1021
01:00:56,320 --> 01:00:59,840
Speaker 4: regulated entity with a regulator, a regulator who's not also

1022
01:01:00,200 --> 01:01:01,760
Speaker 4: the effectively the owner.

1023
01:01:02,720 --> 01:01:05,800
Speaker 3: If someone from the administration were to tap you on

1024
01:01:05,840 --> 01:01:08,120
Speaker 3: the shoulder again and say, hey, do you want to

1025
01:01:08,160 --> 01:01:13,800
Speaker 3: sort out the conservatorship issues and maybe implement a secondary

1026
01:01:13,800 --> 01:01:17,040
Speaker 3: market for construction loans, would you be interested?

1027
01:01:18,120 --> 01:01:23,040
Speaker 4: You know, I didn't think I was coming here to advertise. Yeah, no,

1028
01:01:23,120 --> 01:01:25,360
Speaker 4: I've been, like, I've been thinking about this for a

1029
01:01:25,400 --> 01:01:28,400
Speaker 4: long time and working on it in various different guys.

1030
01:01:28,480 --> 01:01:32,000
Speaker 4: Is so I know a little bit about it? Yeah, yeah,

1031
01:01:32,120 --> 01:01:35,120
Speaker 4: I love a little bit. And you know, I do

1032
01:01:35,240 --> 01:01:38,520
Speaker 4: think that one of the major problems the country faces

1033
01:01:39,360 --> 01:01:43,240
Speaker 4: in terms of the stability of our civil society is

1034
01:01:43,280 --> 01:01:47,960
Speaker 4: providing adequate housing for our citizens, and I think it's

1035
01:01:48,000 --> 01:01:50,000
Speaker 4: really one of the great sources of tension. It's one

1036
01:01:50,000 --> 01:01:51,920
Speaker 4: of the great sources of inflation, which is one of

1037
01:01:51,920 --> 01:01:56,400
Speaker 4: the great sources of tension and in our economy. And

1038
01:01:56,480 --> 01:02:02,320
Speaker 4: so you know, using these things that successfully reformed as

1039
01:02:02,520 --> 01:02:07,520
Speaker 4: instruments to address this fundamental need would be something that

1040
01:02:07,880 --> 01:02:10,240
Speaker 4: should be done. And whether I do it or you know,

1041
01:02:10,800 --> 01:02:14,080
Speaker 4: they take the work I've done and somebody else does it,

1042
01:02:14,080 --> 01:02:14,960
Speaker 4: it should be done.

1043
01:02:15,200 --> 01:02:19,880
Speaker 2: Jim Milston, fantastic conversation, learned so much, so much fun.

1044
01:02:19,960 --> 01:02:23,640
Speaker 2: That was so much fun, fantastic. Hopefully it sounds like,

1045
01:02:23,760 --> 01:02:25,680
Speaker 2: you know, I have no opinions, but it sounds like

1046
01:02:25,720 --> 01:02:29,800
Speaker 2: a very promising idea. Maybe someone listening to this will

1047
01:02:30,200 --> 01:02:31,960
Speaker 2: pick up the ball in some ways. Thank you so

1048
01:02:32,040 --> 01:02:33,440
Speaker 2: much for coming out, Thanks for having me.

1049
01:02:33,520 --> 01:02:36,080
Speaker 4: I really appreciate it. Yeah, that was fantastic, great.

1050
01:02:48,160 --> 01:02:50,760
Speaker 2: Tracy. That was amazing. So, like we'll talk about the

1051
01:02:50,920 --> 01:02:55,080
Speaker 2: housing element, but just like the history and the number

1052
01:02:55,120 --> 01:02:59,600
Speaker 2: of like light bulb moments in that conversation, lingering things

1053
01:02:59,640 --> 01:03:02,640
Speaker 2: that I didn't really understand where the source of that

1054
01:03:02,720 --> 01:03:07,240
Speaker 2: implicit guarantee for Fanny and Freddy came from the arrangements

1055
01:03:07,240 --> 01:03:09,080
Speaker 2: of you know, I sort of got the preferred stock

1056
01:03:09,120 --> 01:03:10,800
Speaker 2: a bit, but that was just that was fantastic.

1057
01:03:10,920 --> 01:03:15,360
Speaker 3: I had forgotten the juicing earnings, like using your cheap

1058
01:03:15,400 --> 01:03:18,480
Speaker 3: funding to buy alt A in Yeah, pre two thousand

1059
01:03:18,480 --> 01:03:19,920
Speaker 3: and eight, I totally forgotten about that.

1060
01:03:20,360 --> 01:03:21,200
Speaker 4: The other thing that I.

1061
01:03:21,200 --> 01:03:23,960
Speaker 3: Was thinking, just hearing the war stories of the financial

1062
01:03:24,000 --> 01:03:28,760
Speaker 3: crisis was how much letting Lehman Brothers go really did

1063
01:03:29,080 --> 01:03:32,760
Speaker 3: crush financial markets? Oh, in many ways, like so much

1064
01:03:32,840 --> 01:03:36,600
Speaker 3: so that a few days or even weeks later, like

1065
01:03:36,800 --> 01:03:39,439
Speaker 3: the conversations about whether or not to bail out other

1066
01:03:39,520 --> 01:03:42,600
Speaker 3: things seemed to have like it was just, yeah, let's

1067
01:03:42,680 --> 01:03:45,240
Speaker 3: do what we can because we let this one entity

1068
01:03:45,280 --> 01:03:48,720
Speaker 3: go and it's caused so many problems. Yeah, that seems

1069
01:03:48,720 --> 01:03:51,120
Speaker 3: like an obvious statement to say in hindsight, but I

1070
01:03:51,160 --> 01:03:53,120
Speaker 3: remember in two thousand and eight, two thousand and nine,

1071
01:03:53,400 --> 01:03:58,320
Speaker 3: there was a vibrant and heated discussion about, you know,

1072
01:03:58,440 --> 01:04:01,240
Speaker 3: whether letting Leman fail was the right thing to do.

1073
01:04:01,360 --> 01:04:03,480
Speaker 2: I know, no, it's incredible, And then you think about, like,

1074
01:04:03,560 --> 01:04:05,880
Speaker 2: you know, what if, like you know, just the sheer

1075
01:04:06,000 --> 01:04:10,880
Speaker 2: scale of AIG's role in this, and you like understand

1076
01:04:10,920 --> 01:04:14,440
Speaker 2: why like they felt that they had to, you know,

1077
01:04:14,640 --> 01:04:18,000
Speaker 2: inject one hundred billion dollars because of just the sheer

1078
01:04:18,080 --> 01:04:21,320
Speaker 2: number of financial instruments all over the world. Some of

1079
01:04:21,400 --> 01:04:23,360
Speaker 2: the US, a lot in Europe would have like gone

1080
01:04:23,360 --> 01:04:24,240
Speaker 2: belly up without that.

1081
01:04:24,560 --> 01:04:27,320
Speaker 3: Yeah. The other thing I was thinking about again sort

1082
01:04:27,360 --> 01:04:32,120
Speaker 3: of big picture realization, but how much of us, like

1083
01:04:32,200 --> 01:04:34,760
Speaker 3: social programs, I guess for lack of a better word,

1084
01:04:34,760 --> 01:04:37,560
Speaker 3: are wrapped up in like tax credits. Yeah, I know,

1085
01:04:37,680 --> 01:04:39,560
Speaker 3: incentives versus direct fund So we.

1086
01:04:39,600 --> 01:04:41,720
Speaker 2: Got to do more, you know, one episode that we

1087
01:04:41,840 --> 01:04:45,280
Speaker 2: should do and it's kind of in the context of

1088
01:04:45,280 --> 01:04:48,720
Speaker 2: the Inflation Reduction Act, but that market I'm aware for

1089
01:04:48,920 --> 01:04:51,840
Speaker 2: tax credits because if you don't if you let's say

1090
01:04:51,840 --> 01:04:54,560
Speaker 2: you have some tax credit, but if you don't pay

1091
01:04:54,600 --> 01:04:58,400
Speaker 2: taxes because of your money losing entity, which many again

1092
01:04:58,480 --> 01:05:01,040
Speaker 2: this is in the irate context. Many of them are

1093
01:05:01,040 --> 01:05:03,360
Speaker 2: because their startups so they don't get any value out

1094
01:05:03,400 --> 01:05:05,560
Speaker 2: of that, or they're sort of new companies, you know,

1095
01:05:05,600 --> 01:05:08,800
Speaker 2: making batteries. But with this secondary market that's emerged for

1096
01:05:08,920 --> 01:05:11,040
Speaker 2: tax credit so that they can sell and Jim talked

1097
01:05:11,040 --> 01:05:12,920
Speaker 2: about this a little bit, that you could sell that

1098
01:05:13,040 --> 01:05:15,520
Speaker 2: text credit to someone who does want to reduce their bill,

1099
01:05:15,600 --> 01:05:17,560
Speaker 2: Like that market is booming, and so we should do

1100
01:05:17,600 --> 01:05:18,280
Speaker 2: an episode on that.

1101
01:05:18,520 --> 01:05:20,680
Speaker 3: Yeah, I would be totally up for that, but we

1102
01:05:20,760 --> 01:05:23,960
Speaker 3: have to have Jim back On's to talk more totally

1103
01:05:24,000 --> 01:05:26,000
Speaker 3: well the Treasury experience and all of that.

1104
01:05:26,440 --> 01:05:29,040
Speaker 2: Yeah, he would be a good one for a live episode. So,

1105
01:05:29,120 --> 01:05:32,360
Speaker 2: like there's something like about you know, the history of whatever,

1106
01:05:32,440 --> 01:05:34,680
Speaker 2: So we should keep that in mind. Idea on the

1107
01:05:34,760 --> 01:05:38,320
Speaker 2: topic at hand. You know, it certainly seems there are

1108
01:05:38,320 --> 01:05:42,840
Speaker 2: many constraints to housing. Clearly, finance is clearly a big one.

1109
01:05:43,120 --> 01:05:46,640
Speaker 2: And if you're able to really expand that market, and

1110
01:05:46,680 --> 01:05:48,800
Speaker 2: it's pretty clear it makes sense that if you have

1111
01:05:48,880 --> 01:05:51,400
Speaker 2: the backstopping authority that then the commercial banks like a

1112
01:05:51,480 --> 01:05:53,919
Speaker 2: JP Morgan would be more than happy to step into

1113
01:05:53,920 --> 01:05:56,360
Speaker 2: that market and flip it for a small premium to

1114
01:05:56,840 --> 01:05:59,840
Speaker 2: Fanyer or Freddy. But it does seem as though if

1115
01:05:59,840 --> 01:06:02,920
Speaker 2: you could solve that problem, like there is serious numbers,

1116
01:06:02,920 --> 01:06:06,040
Speaker 2: a few hundred thousand extra units per year in the math,

1117
01:06:06,400 --> 01:06:08,360
Speaker 2: and it sounded like it made sense to me you

1118
01:06:08,440 --> 01:06:10,280
Speaker 2: might actually be able to put a dent in this stuff.

1119
01:06:10,440 --> 01:06:12,480
Speaker 3: I mean, here's one thing I will say, we do

1120
01:06:12,680 --> 01:06:15,760
Speaker 3: so many episodes here on all thoughts where we identify

1121
01:06:15,800 --> 01:06:18,400
Speaker 3: a problem and we ask what the solution is, and

1122
01:06:18,440 --> 01:06:22,480
Speaker 3: we effectively get no solution, no solution, or just crickets.

1123
01:06:22,680 --> 01:06:25,840
Speaker 3: It was very nice to talk about a problem that

1124
01:06:25,880 --> 01:06:28,560
Speaker 3: we have discussed previously on the show, the lack of housing,

1125
01:06:28,880 --> 01:06:31,480
Speaker 3: and actually be able to talk about a potential solution.

1126
01:06:31,800 --> 01:06:34,280
Speaker 2: Yeah, and so two things on that that I had

1127
01:06:34,680 --> 01:06:38,960
Speaker 2: thoughts about. So one is it's very powerful that we

1128
01:06:39,120 --> 01:06:41,880
Speaker 2: have the vehicles already to do this in theory and

1129
01:06:41,920 --> 01:06:45,200
Speaker 2: imagined that different lawyers might have different opinions. But like,

1130
01:06:45,280 --> 01:06:47,480
Speaker 2: at least in theory, you know, there's a lot of

1131
01:06:47,480 --> 01:06:50,320
Speaker 2: stuff that we could do with legislation, but nothing it's

1132
01:06:50,320 --> 01:06:52,960
Speaker 2: so hard to get anything passed, right, So if you

1133
01:06:53,080 --> 01:06:56,920
Speaker 2: have a way of doing something within an existing financing vehicle,

1134
01:06:57,360 --> 01:07:00,280
Speaker 2: then that automatically, you know, among pie and the sky

1135
01:07:00,400 --> 01:07:02,480
Speaker 2: dreams like that makes it a little less pie in

1136
01:07:02,520 --> 01:07:05,920
Speaker 2: the sky. But it's also interesting to me just politically

1137
01:07:06,720 --> 01:07:09,520
Speaker 2: that there is so much public anxiety about the cost

1138
01:07:09,520 --> 01:07:13,120
Speaker 2: of housing and the housing shortage and all this stuff,

1139
01:07:13,160 --> 01:07:15,400
Speaker 2: and people feel very stressed about their ability to come

1140
01:07:15,440 --> 01:07:17,840
Speaker 2: up with a down payment or how much. And yet

1141
01:07:17,880 --> 01:07:22,160
Speaker 2: like at the national political level, like it never really

1142
01:07:22,240 --> 01:07:22,720
Speaker 2: comes up.

1143
01:07:22,920 --> 01:07:26,720
Speaker 3: Yeah, and it's just crazy concrete proposals. You certainly don't

1144
01:07:26,760 --> 01:07:30,080
Speaker 3: hear Fanny or Freddy mentioned on like the debate stage.

1145
01:07:30,200 --> 01:07:33,160
Speaker 2: No, not ever, right, or you don't hear any like

1146
01:07:33,280 --> 01:07:36,000
Speaker 2: I'm not going to say that Joe Biden or Trump

1147
01:07:36,080 --> 01:07:39,280
Speaker 2: have no policies because I'm sure I know, like you know,

1148
01:07:39,400 --> 01:07:42,920
Speaker 2: in Biden's budget there's something like I know, but it

1149
01:07:43,000 --> 01:07:46,480
Speaker 2: is not something that given the amount of public anxiety

1150
01:07:46,480 --> 01:07:49,480
Speaker 2: there is about the cost of housing relative to the

1151
01:07:49,560 --> 01:07:53,320
Speaker 2: amount that politicians talk about ideas to solve the cost

1152
01:07:53,320 --> 01:07:55,920
Speaker 2: of housing, it's like there's incredible disconnect to me.

1153
01:07:56,160 --> 01:07:58,720
Speaker 3: Well, also to Jim's point early on, this is one

1154
01:07:58,720 --> 01:08:00,800
Speaker 3: of the few areas where there's seems to be some

1155
01:08:01,160 --> 01:08:05,520
Speaker 3: bipartisan agreement, at least in the sense of identifying the

1156
01:08:05,560 --> 01:08:08,640
Speaker 3: problem that housing is expensive, there is a structural shortage,

1157
01:08:08,760 --> 01:08:12,400
Speaker 3: and maybe we should do something about that. Well, shall

1158
01:08:12,400 --> 01:08:12,880
Speaker 3: we leave it there?

1159
01:08:12,960 --> 01:08:13,640
Speaker 2: Let's leave it there.

1160
01:08:13,840 --> 01:08:16,600
Speaker 3: This has been another episode of the Odd Lots podcast.

1161
01:08:16,800 --> 01:08:19,600
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy.

1162
01:08:19,280 --> 01:08:22,120
Speaker 2: Alloway and I'm Joe Wisenthal. You can follow me at

1163
01:08:22,160 --> 01:08:26,120
Speaker 2: The Stalwart. Follow our producers Carmen Rodriguez at Carman Ermann

1164
01:08:26,160 --> 01:08:29,720
Speaker 2: Dashel Bennett at Dashbot and Kelbrooks at Kelbrooks. Thank you

1165
01:08:29,800 --> 01:08:32,960
Speaker 2: to our producer, Moses onm. For more Oddlots content, go

1166
01:08:32,960 --> 01:08:35,840
Speaker 2: to Bloomberg dot com slash odd Lots, where we have transcripts,

1167
01:08:35,880 --> 01:08:38,360
Speaker 2: a blog, and a newsletter. And if you want to

1168
01:08:38,400 --> 01:08:41,360
Speaker 2: talk about these topics more with fellow listeners, you should

1169
01:08:41,400 --> 01:08:43,759
Speaker 2: check out our discord. We have a real estate channel

1170
01:08:43,840 --> 01:08:45,519
Speaker 2: in there. I'm sure there's gonna be a lot of

1171
01:08:45,600 --> 01:08:49,760
Speaker 2: conversation about this one. Check out discord dot gg slash odlogs.

1172
01:08:49,880 --> 01:08:52,280
Speaker 3: And if you enjoy odd Lots, if you like it

1173
01:08:52,320 --> 01:08:55,720
Speaker 3: when we talk about solutions to problems rather than just

1174
01:08:55,760 --> 01:08:59,000
Speaker 3: discuss how endemic those problems actually are, then please leave

1175
01:08:59,080 --> 01:09:03,160
Speaker 3: us a positive You on your favorite podcast platform, and remember,

1176
01:09:03,280 --> 01:09:05,680
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1177
01:09:05,800 --> 01:09:08,920
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1178
01:09:08,960 --> 01:09:12,120
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1179
01:09:12,360 --> 01:09:14,720
Speaker 3: In order to do that, just go to Apple Podcasts,

1180
01:09:14,800 --> 01:09:18,439
Speaker 3: find the Bloomberg channel and follow the instructions there. Thanks

1181
01:09:18,439 --> 01:09:34,440
Speaker 3: for listening