A Radical Plan to Build Millions of New Homes
Millstein wants to use Fannie Mae and Freddie Mac to create a secondary market for construction loans. This would lower the cost of borrowing for developers, making it cheaper to build new homes.
Imagine if building millions of new homes could be as simple as flipping a switch. Well, Jim Millstein, at Guggenheim Securities and former US Treasury official, thinks it can be. And his plan involves two familiar names: Fannie Mae and Freddie Mac.
The Housing Crisis: A Numbers Game
The US needs over 7 million new homes to meet rising demand. Yet, high interest rates and expensive construction costs have stalled development. Permits for new multifamily buildings have plunged, and many projects are stuck in limbo.
Millstein’s Big Idea
Millstein wants to use Fannie Mae and Freddie Mac to create a secondary market for construction loans. This would lower the cost of borrowing for developers, making it cheaper to build new homes. Think of it as giving builders a financial boost, so they can get more homes off the ground.
The Mechanics
Here’s how it works: Right now, developers typically put up 40% of the construction cost and get a loan for the remaining 60%. Millstein’s plan would have the government provide 20% of the construction cost through mezzanine financing. This means developers would only need to cover 20% themselves, making it easier to start new projects.
Why This Matters
The difference in interest rates is staggering. Mezzanine construction loans can have rates as high as 12-18%. In contrast, typical Fannie Mae mortgages are less than 7%, thanks to the US government’s backing. By extending this lower rate to construction loans, the cost of building new homes would drop significantly.
The Potential Impact
Millstein’s math is compelling. A $10 billion housing construction fund could leverage $40 billion in private capital, generating around 300,000 new housing units. Over five years, this could fill the housing shortfall, creating millions of new homes.
The Roadblocks
Of course, expanding the role of Fannie and Freddie raises eyebrows. These government-sponsored enterprises were bailed out during the Great Financial Crisis after financing billions in risky mortgages. But Millstein believes his plan is legally viable and doesn’t require new legislation.
The Bigger Picture
Millstein’s proposal isn’t just about building homes; it’s about solving a national crisis. Housing scarcity affects everyone, and this plan has bipartisan support. By making it cheaper to build, we can meet the demand for new homes and stabilize the housing market.
The Takeaway
In a world where housing costs are soaring, Millstein’s plan offers a glimmer of hope. By leveraging the power of Fannie Mae and Freddie Mac, we could see a construction boom that fills the housing gap and makes homes more affordable for everyone. So, the next time you hear about Fannie and Freddie, remember: they might just hold the key to solving America’s housing crisis.