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

    enJuly 18, 2024
    What challenges does the current economic climate pose for housing development?
    How can regulatory and zoning restrictions affect new construction?
    What potential solutions did Jim Milstein suggest for housing finance strains?
    What role did the government play during the 2008 financial crisis?
    How could a secondary market for mezzanine loans benefit the housing market?

    Podcast Summary

    • Housing financing strainsThe current economic climate, with inflation and rising interest rates, makes it less appealing for developers to build new multifamily units due to higher costs and uncertainty caused by rate hikes, exacerbated by regulatory restrictions and zoning limitations.

      The current economic climate, marked by inflation and rising interest rates, presents challenges for increasing housing supply, particularly in the multifamily sector. The higher costs of building and uncertainty caused by rate hikes make it less appealing for developers to build new units. Additionally, the regulatory environment and zoning restrictions can further impede new construction. Jim Milstein, a guest on the Odd Lots Podcast, who previously worked on restructuring housing finance institutions at the Treasury Department, offered potential solutions to alleviate some of these financing strains. However, the multifaceted nature of the housing shortage issue requires a comprehensive approach involving policy changes, supply chain improvements, and labor solutions. The ongoing conversation around this topic is crucial to finding long-term solutions to meet the growing demand for housing.

    • AIG's interconnected debtsThe 2008 financial crisis revealed the complexity and interconnectedness of AIG's debts, which took weeks to unravel and ultimately required a massive bailout

      During the 2008 financial crisis, AIG's involvement in complex financial transactions, such as internal securitizations, led to a web of interconnected debts and obligations. Understanding this network took weeks, involving extensive questioning of various bank managers. The crisis culminated in AIG's near collapse, requiring a massive bailout by the Federal Reserve and the Treasury Department. This event, which was part of the broader financial crisis, raised concerns about moral hazard and the potential for future bailouts. The government eventually recouped its investment in AIG, but only after a significant downsizing and restructuring of the company.

    • Government intervention in housing market crisisDuring the 2008 financial crisis, the US government took control of Fannie Mae and Freddie Mac, providing an implied guarantee for their mortgage-backed securities and stabilizing the housing market

      During the 2008 financial crisis, the US government played a crucial role in stabilizing the housing market by taking control of Fannie Mae and Freddie Mac through conservatorships and purchasing $192 billion worth of preferred stock in the two entities. This government intervention effectively guaranteed the debt and contracts of Fannie Mae and Freddie Mac, providing much-needed stability to the financial system. Fannie Mae and Freddie Mac, as government-chartered entities, had previously purchased and guaranteed mortgages, creating a secondary market for mortgage credit. Their charters and the ability to borrow from the Treasury Department gave investors an implied guarantee, making their mortgage-backed securities comparable to US Treasuries. The Housing and Economic Recovery Act of 2008 formalized the government's role in ensuring their solvency.

    • Treasury's role in housing market stabilizationThe Treasury's $192 billion investment in Fannie Mae and Freddie Mac during the 2008 crisis prevented their collapse and made them profitable entities under government control, generating around $23 billion in net income annually and over $300 billion in dividends for the Treasury

      The Treasury's intervention during the 2008 financial crisis played a significant role in stabilizing the housing market and mortgage finance industry. By investing $192 billion in preferred stock into Fannie Mae and Freddie Mac, the authorities were able to prevent their collapse and eventually wind down their large portfolios. Today, the government is the largest player in the mortgage finance market, with approximately $9 trillion of mortgage credit risk residing on the balance sheets of Fannie, Freddie, and Ginnie Mae. Despite ongoing lawsuits and debates about the future of housing finance, these entities remain under government control and have become profitable, generating around $23 billion in net income annually. The Treasury Department, which owns $192 billion of senior preferred stock, has already received over $300 billion in dividends.

    • Secondary market for construction loansCreating a secondary market for construction loans could increase liquidity and unlock up to 5M new housing units in the US, using mezzanine financing to leverage developer equity and minimize budget impact

      To increase housing supply in the US, government agencies could create a secondary market for construction loans to increase liquidity in the construction finance market. This would help ease the impact of high interest rates and expensive financing, allowing for more affordable housing projects and potentially unlocking between one to five million new units. The federal government could provide mezzanine financing, which would leverage the equity of developers four to one and allow them to build affordable housing while still earning the same returns. This would be a more efficient way to address the current housing supply shortage and could be done through a revolving loan program with minimal ongoing budget impact. Currently, the federal government's role in housing is limited, with a total budget for new housing and urban renewal being only $4 billion compared to the military budget's $800 billion.

    • Mezzanine lending authority increaseIncreasing mezzanine lending authority to $100 billion could construct 250,000 to 400,000 new housing units annually, mitigating the housing shortage, but concerns over risks, particularly with interest rate uncertainty and government's ability to hold loans, need to be addressed before implementation.

      Increasing mezzanine lending authority to $100 billion could facilitate the construction of 250,000 to 400,000 new housing units per year, helping to address the current housing shortfall. However, concerns exist regarding the potential risks of these construction loans, particularly with interest rate uncertainty and the US government's ability to hold them through the cycle. The risks are considered manageable due to the low credit losses on Fannie and Freddie's mortgage books, the growing population, and the availability of secondary markets for these loans. However, legal and regulatory hurdles would need to be addressed before implementing this solution. Despite these challenges, there is recognition of the housing supply problem in the US and the potential for government intervention to augment housing supply.

    • Secondary market for mezzanine construction loansFannie Mae and Freddie Mac could create a secondary market for mezzanine construction loans through administrative action, potentially benefiting the housing market and civil society.

      The creation of a secondary market for mezzanine construction loans through Fannie Mae and Freddie Mac could be achieved through administrative action with the cooperation of the Treasury Department and the Federal Housing Finance Agency, without requiring Congressional intervention. This idea gained traction during the conversation due to the restored safety and soundness of these entities and the potential benefits it could bring to the housing market and civil society. However, the outcome may depend on the political climate and the administration in power. The conversation also shed light on the history of Fannie Mae and Freddie Mac, the financial crisis, and the role of tax credits in the US economy.

    • Expanding role of Fannie Mae and Freddie MacExpanding the role of Fannie Mae and Freddie Mac in the housing market could lead to the creation of hundreds of thousands of additional housing units per year. Commercial banks could purchase mortgages from these agencies, providing a market for them to operate in. However, passing legislation to make this a reality is a significant challenge.

      There is a potential solution to the housing crisis in the United States, which involves expanding the role of Fannie Mae and Freddie Mac in the housing market. This could lead to the creation of hundreds of thousands of additional housing units per year. The potential for this solution lies in the fact that commercial banks, such as JP Morgan, could step in and purchase mortgages from these agencies, providing a market for them to operate in. However, the political will to pass legislation to make this a reality is a significant challenge. Despite the public anxiety and widespread agreement that housing is expensive and there is a structural shortage, it is rarely discussed at the national political level. This disconnect between public concern and political action presents an opportunity for creative solutions within existing financing vehicles. If you're interested in discussing this topic further, join the conversation on our Discord channel. And if you're a Bloomberg subscriber, you can listen to all of our episodes for free by connecting your account with Apple Podcasts.

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