Will Trump's Plan To Privatize Mortgages Fix the Housing Market?
(Source: Future Atlas on Flickr.)
President Trump has proposed the privatization of Fannie Mae and Freddie Mac. These organizations back the majority of mortgages in the U.S. and have been under a government conservatorship since the 2008 financial crisis. In this Upzoned episode, Chuck and Abby discuss the proposal and how it would affect the housing market.
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Abby Newsham 0:04
This is Abby, and you are listening to up zoned.
Abby Newsham 0:18
Hey, everyone, thanks for listening to another episode of up zone to show where we take a big story from the news each week that touches the strong towns conversation, and we up zone it. We talk about it in depth. I'm Abby Newsham, a planner in Kansas City, and today I am joined by my friend Chuck Morone, founder of strong towns. Hi Chuck. Welcome back.
Chuck Marohn 0:40
Hey. So nice to chat with you. I don't remember the last time we even did this. It feels like it's way too long. It's
Abby Newsham 0:46
been forever. We've just both had crazy schedules and traveling and other things going on, and thankfully, I've been able to record this a couple of weeks with members of your staff. But yeah, it's, it's fun to have you back here. We have
Chuck Marohn 1:03
lots of smart people on the team, so it's been cool that other people have subbed in, but I miss chatting with you, which is my, like, great joy of doing this. So, yeah, yes,
Abby Newsham 1:13
fun, fun weekly chat for sure. Well, people
Chuck Marohn 1:17
don't know too that we start these and then, like, we're already 15 minutes in, and we haven't even hit record yet, because we have to catch up on life. I
Abby Newsham 1:26
know exactly, for all those that are wondering about the weather in Brainerd, Minnesota, it is snowing, inches
Chuck Marohn 1:32
of snow. Yes, yeah. And it is April
Abby Newsham 1:35
4 right now, yeah, April,
Chuck Marohn 1:37
April. And we have, we have more snow now than we had at Christmas, which is just crazy, because it was we had a 70 degree day like two weeks ago, and now it is. It is like you not only could cross country ski, but like it's just not stopping. So, yeah, well, it sounds
Abby Newsham 1:54
like you live in Missouri.
Chuck Marohn 1:57
Um, so, yeah, not yet.
Abby Newsham 1:59
Not yet, okay. Well, let's talk housing today. We are going to be discussing an article that was published via WBUR on point, and it is entitled, how Trump Trump plans to get government out of the mortgage business. And this was published by Paige Sunderland and Megan Chakrabarti. The piece explores the President's proposal to privatize Mortgage Finance giants Fannie Mae and Freddie Mac which have been under a government conservatorship since the 2008 financial crisis. Together, they back the majority of mortgages in the US, effectively shaping who can buy a home under what terms. This proposal would wind down these institutions and would apparently create a really seismic, seismic shift in the American housing finance system, reducing federal involvement and opening the door for more private market control. Supporters argue that privatization could reduce taxpayer risk and promote market efficiency, but critics say that it could lead to tighter lending standards, reduced access to home ownership, especially for first time, and lower income buyers and increase housing instability. So today, I want to zoom in to some of those big questions. What does it mean to center our housing system around government backed home ownership? What happens if the system is dismantled or privatized, and how does this all intersect with the strong towns, conversation about financial resilience, neighborhood affordability and all of these, I guess, myths, you might say, around the American dream. So I'll leave it at that, Chuck, what are your first thoughts about the idea of privatizing Fannie Mae and Freddie Mac
Chuck Marohn 4:01
well, people can't see my face, but I was making faces and trying not to. I know I was trying. I was like, I please. I don't want to, like, mess with Abby's, like, Great dissertation here, because, as you were describing the benefits from like, you know, okay, advocates of this think that this will happen. And I'm like, no, none of those things will happen. And then as detractors think that this could take away from this. And I'm like, Oh my gosh, it's the exact opposite. This is one of those issues where I feel like, you know, I'm crazy because everybody's wrong and I don't really know, like what to do with that information. Here's where I'd like to start. And I'm I'm going to start with a defense of redlining. I'm actually not going to defend, like the worst practices of redlining, but I want to give I want to go back to the 1930s and explain how we got redlining, because there's an instinct in it that is not right. Wrong, and I talk about this in escaping the housing trap. So in the 1930s all mortgages were local. They were through local banks. You were going to go and get, if you were going to, if you were going to get a mortgage for a home, you had to have a 50% down payment. You were going to go to a local bank to finance the rest. They were going to finance it in like a three year, five year interest only payments with a big balloon payment at the end. That's That's what housing mortgages look like in the 1930s and really had looked that way, as far as I can tell, as far as I can see, like throughout all of human history, mortgages. There were no such thing as a 30 year mortgage, and I can explain why in a minute here. But all of these things like were not possible with local finance and local banks. It just didn't work that way. You had to have a lot of skin in the game. The bank was very, very risk averse. They didn't want to lose money, and they didn't want to lose money because they were having your money as their deposit. That's what they were lending out, was your money, and you were not going to, as a depositor, tolerate banks that would do, you know, huge risks. So in the 1930s as housing is dropping in price, what you find is that when people's loans start to reset, these three or five year balloon payments come due, the banks won't refinance them because they don't have as much equity anymore. If you have to have 50% down, and then your house drops in value. Now we refinance. You have to have 50% equity again. You don't have that cash. The bank's not going to refinance, and all of a sudden, now you're in default. The federal government steps in, and the federal government says, homeowners Loan Corporation, local banks, don't foreclose. We will buy those loans from you. And ultimately, what the federal government does is they set up a system to where the local banks can make what in a local bank term would be a really risky loan, a loan with less down payment alone, with longer terms. So first it was 12 years, and then it was 15 years, and then it was 20 years, and then it years, and then it was 30 years, longer. Terms are more risky for local local banks can't write those loans. And so the federal government said, Hey, if you meet these requirements, we will buy those loans from you. The requirements, and this is, I think this is, like, a really important part of this, the requirements were designed to be ultra, ultra, ultra conservative. And I don't mean that politically. I mean that financially. The idea was, the federal government is collecting taxes from all these taxpayers, and we are going to now back mortgages. And so what we want is we want the federal government not taking risks with our money, not gambling on, you know, weird housing. We want them to do just really conventional things, really risk adverse. And so if you meet all these requirements, and remember, there's no at this point, big secondary market, there's no credit scores. There's none of the stuff that we know today. Those are all downstream of this decision. What there is is you meeting with a banker underwriting your loan, saying, Yes, this person can qualify for a loan. So what they did is they set up things like the homeowners Loan Corporation maps, if you're in a green area or a yellow area, Hey, these are really good neighborhoods. Lend all the money there, because we're not going to lose money there. If you're in a red neighborhood, Red Line neighborhood, nope. Those are bad neighborhoods. Don't lend money there. The instinct behind it was, if the federal government's going to put taxpayer money on the hook on the line, we should not gamble with taxpayer money. We should make sure we get our money back. So only do it with high credit worthy individuals with lots of down payment in stable neighborhoods. The other side of that is you get, okay, what's a good neighborhood? Well, this one's got people we don't like, so this one's a bad neighborhood. Don't lend there. This one's got people we do like, so go ahead and do it there. And there is a racial component that's really gross and icky to us today, if we, if we look at it though, part of what they were doing, and I think this is important to understand, this whole market, is that they were trying to avoid the federal government taking on risk. What where we are today in 2024 is the exact opposite. It's the federal government should take on all the risk, and taxpayers should have all the risk, and we can even privatize it and have the taxpayers backstop it, and basically get none of the upside gain, but all of the downside risk. What we have done is we've taken a system that was originally set up to protect taxpayers. And I think, you know, did real harm to neighborhoods and people right, and now have switched it the other way around, which is to say, how do we take the maximum advantage of taxpayers without any of the any of the upside?
Abby Newsham 9:58
So. So you've taken us back to the early to mid 1900s and some of the initial structures that created the mortgage market that we see today. This article talks about in the interview, talks about how we basically didn't have a completely, we didn't have a market that was under conservatorship until 2008 Can you explain and kind of tease out what that looked like versus what it looks like today?
Chuck Marohn 10:35
That's not true. So Fannie Mae was set up in the 1930s and Fannie Mae was a government, in a sense, a government run. You can think of as conservatorship, an entity that was backed by the government and run by the government, but it was a, technically like a government run Corporation, and they would buy these loans from local banks. What they wanted is they wanted the banks to lend a lot more. They wanted the banks to write more mortgages. Well, if you're a bank and you have, you know, X amount of reserves, and you go out and you write a number of loans, you use up your reserves, and you can't write more loans. What they said is that, okay, banks, if you're holding these mortgages, we'll buy them from you, they'll give you cash, and so then the government will own the loan, and then you've got cash, and you can go out and write more loans. The idea was to get the banks writing more and more loans. They also wanted to make it so the banks would write loans that they didn't want to hold. So a bank would do these short term loans. And the federal government said, We want you to lower the payments. We want to make it easier for people to basically borrow more and spend more on housing. So we'll finance that over a longer period of time. We know you as a local bank can't take that risk, so we, the government, will take that risk for you. So for example, let's say that you're writing mortgages at 3% because interest rates are at 1% that's kind of what we experienced over the last decade, and now, all of a sudden, interest rates go up to 5% Well, if you're holding a 30 year mortgage at 3% but you've got to pay your depositors 5% as a bank, you're losing money every month. Well, what do you do with that loan? Well, if it's a qualifying loan, you sell it to the government, and so the government takes that loss and you can get your money back and then go write a loan at 5% so now as a bank, you're doing way better. So what this allowed is it allowed the government to backstop and basically be the loser, the sucker at the card table for home mortgages in order to create this bigger market. That's the way it was until the 1960s as this, as this system developed, the Federal part of it started to get bigger and bigger and bigger. And what they did is they said, We got to get the government out of this business, because it's a bad business to be in. What we want is we want the banks to basically own this secondary market. And so they started at a certain point in the 1960s saying, we're going to give you cash for your mortgage, like you, you lent someone $100,000 we will give you $100,000 and take that loan, and then we'll collect the payments from the person. That was what it was in the depression by the 1960s what they'd say is, we'll give you $90,000 and then we'll give you $10,000 of stock in Fannie Mae. So you now own part of the bank, and the government will, you know, pay you cash and stock. So ultimately what happened is the banks started to own this secondary market. So it was slowly privatized over time. Freddie Mac was introduced in 68 or 69 with the same kind of concept. The banks would buy this out and own it. And then ultimately these became publicly traded corporations. You and I could have in the 1990s and early 2000s bought money in Freddie Mac and Fannie Mae. The difference is, both of these entities have backing guarantees, like a implied guarantee by the federal government. So if they went bad, which is what happened during the great financial crisis, because they made all kinds of risky bets and did all kinds of crazy stuff. And is, at the base of it, 30 year mortgages are a bad investment. Again. You go back to that if you write a three if the prevailing rate is 3% and then it goes up to 5% who wants those 3% loans? I mean, they're just, they're they're bad performing loans at that point because they're paying a lower interest rate than market rate. This is why local banks won't take on that long term risk. So you had this company that was set up to lose money, that you privatized, because in a in a falling interest rate market, it can make a lot of money. Money as soon as interest rates start to go the other way, like they did in 2008 you know, up to 2008 like they're doing now, the business model of Fannie Mae and Freddie Mac becomes really, really, really bad. Like, really bad. I feel like I've walked you down this path now, where we privatize this thing, this entity, because there was a period of time where they could make money, and then as soon as they started to lose money, the government had to step in and become, again, the loser at the card table, right?
Abby Newsham 15:30
And now they want to unravel that and shift it to be a more privatized market.
Chuck Marohn 15:37
The idea was, the idea was in, you know, in the last like 10 years, let's get this thing privatized again. And let's do it for two reasons. One, interest rates are low and going down, so there's, in a sense, private money to be made. And two, and I think this is the more important one right now we can do. And this is why, if we go back to your initial list of here's the benefits. The reason to privatize now is so that Fannie Mae and Freddie Mac can do riskier loans to higher risk individuals over longer terms. So 40 year mortgages, 50 year mortgages to people who can barely afford to pay. And the idea is, if you are, let's just say, a banking advocate, or a, you know, conservative politician. The idea is, this is the free market at work. If you're a liberal, progressive politician, it's the idea that we can get more people into housing without crashing housing prices, like, we can just make it so Abby, instead of getting a 30 year mortgage, you can get a 50 year mortgage and like, yeah, pay more for that same hours, finance your payment. Yeah, right. This is, to me, like, the sickest. This is, like, the sickest kind of thing that we can do for people. There was one point in the story where the interviewer said as like a premise, well, the 30 year mortgage just worked out really well, right? And then the guy being interviewed is like, Oh, absolutely, it's a great product. It is. It is like the worst thing we've done to our society. And I realize it's like the bedrock of home ownership, and it's the bed, if you want to point to one thing that has made housing absolutely unaffordable for people, it is the establishment of the 30 year mortgage. But then even more so than that, it is the series of downstream expansions, gambling, hypothecations, securitization. It's all the stuff that has been derivative out of that to take what is a bad financial investment. There's a reason why it didn't exist prior to 1930s because you can't make money off of it. You are guaranteed to lose money if you own 30 year mortgages. It took that investment and made it a like the foundational part of our financial system, the find the foundational part of our economy, the foundational part of like home ownership is a really bad financial product.
Abby Newsham 18:02
So if I'm following you correctly, your thought is that they are moving to privatize Fannie Mae and Freddie Mac in some ways, to extend, provide an extended mortgage timeline.
Chuck Marohn 18:18
Yeah, I think they're doing this to loot. It really, basically, okay,
Abby Newsham 18:22
so, so, I mean, in your perspective, what would be the outcome of a 4050, year mortgage? I mean, I think my thought is that at first, people who are utilizing this tool would be able to buy housing, there would be expanded accessibility, and then as people realize that people can afford, I guess, more house with less monthly payments, housing prices may increase. Is that your perspective that eventually that would lead to more inflation in the home or housing market. Yeah,
Chuck Marohn 19:01
that's the that's okay. So understand that from the finance sector. The thing that makes housing work better is when prices go up, if housing prices go down, aka, become more affordable, that's a really good outcome for people looking to buy. It's a horrible outcome for bankers. It's a horrible outcome for finance people. It's a horrible outcome for hedge funds and mortgage backed security owners and basically, like, because we built our economy on housing finance, it's a bad outcome for our economy,
Abby Newsham 19:35
where I was going to say a bad outcome for like, the global financial system, yeah, yeah, it's a huge ripple effect. So,
Chuck Marohn 19:45
so if you like, if Abby Newsham can afford $2,000 a month in rent, we could get you into and you can then take that and say, $2,000 a month for a house payment with a 30 year mortgage, we can buy you. I don't know what the dollar amount would be, but like every. X amount of house. If we make that a 50 year mortgage, we can buy you 140% of X amount of house for the same monthly payment. Now you can pay 40% 50% more. Okay. Who's gonna own that 50 year bond? Well, in the short term, it would be a privatized Fannie Mae or Freddie Mac, yay. They can take that huge risk, and as long as interest rates are either flat or going down, they can make that kind of work. There's a whole bunch of things that are like embedded in Fannie and Freddie right now that are disastrous, but let's, let's pretend that those don't exist. They can make these things work. But as soon as interest rates go up substantially, or we have a bout of inflation, or anything like that, what you see is what we saw in the 1960s and the 1970s and the 1980s and again, in 2008 people have to come in and bail these things out. It will be the government taking the loss, and the private sector, which is basically like looted this thing, to get a bunch of people into long term loans that they can't afford will get the gains in the short term. I feel like this is where both political dispositions at the national level conspire to screw everybody in the real world. And I don't know how else to say it,
Abby Newsham 21:16
so maybe let's zoom in a little bit on some of the deeply rooted ideas around American Housing Policy, that home ownership is kind of this ultimate pathway to building wealth at the individual and family level. And this belief has shaped our society in a lot of ways, from you know, mortgage financing, but also local zoning laws
Chuck Marohn 21:44
to NIMBYs to, yeah, I mean, it's really
Abby Newsham 21:47
like this. This is the thing that people see as, like their I mean, it's, it's like, it's like the safety, you know, it's like the ultimate stability for people to own a home, to accrue wealth. I mean, that is a goal that people have. Is this in your in your mind? Is this the best way for us to be thinking about how we build strong towns? Is home ownership something that we should be utilizing as a wealth building tool in the next 50 to 100 years. Or should the way people build wealth become detached from the home ownership system? Should it be something else?
Chuck Marohn 22:38
This is like the core of the housing trap, right? Yeah? Because, as you ask that question, there's a whole bunch of people listening who probably are very conflicted. They're like, yeah, it should be disconnected,
Abby Newsham 22:50
yeah. And I'm a homeowner and you're a homeowner. I mean, I It's like, I understand, like, it is something that is a privilege and something that is, you know, it's a wealth building tool, right? It is. But
Chuck Marohn 23:05
what would happen to you today, Abby, if I said the value of your home is going to be cut in half. You're a recent homeowner, so my assumption would be you would be underwater. I'm a longer term homeowner. So what that would do is just wipe out all my equity, basically. And so the, you know, the question is, like, could you tolerate that?
Abby Newsham 23:29
Well, for me, yeah, it would mean that I just don't move, like, until further notice, right?
Chuck Marohn 23:35
Okay, let's, let's suss that out a little bit. You don't move. You don't switch jobs outside of your market, you don't marry someone who already has a house where you would have to, like, you know, sell your house or move or, you know, or someone who's underwater themselves. You You know it. It has so many like, massive downstream effects, where you are, in a sense, trapped because of this financial product, right?
Abby Newsham 24:02
Well, yeah, but let me, let me just say that people, I think, in the past couple of years, because of such a big change in interest rates, are also trapped in different ways.
Chuck Marohn 24:14
Yes. I mean, I am sitting on a three and five eighths mortgage,
Abby Newsham 24:19
right? So you're not going to sell your house? No, my
Chuck Marohn 24:23
wife and I are very happy in our house, and we like our neighborhood, and we're very happy here, but like, you know, we have a daughter. Our younger daughter is going off to college in the fall. The other daughter is already in college. The idea that in the next couple of years we might want to move or relocate or so, those are not really viable options for us, because, you know, we'd have to basically, like, take out a new loan. That would be very, very disadvantageous. On the other hand, drop the value of our house by 50% which is what you would have if you didn't have this, like, crazy financialization of it, you know, allowing the. The prospective new buyer of my house to overpay by a significant amount from what they can afford. That's not possible, so I would have to adjust down our home price do that to me, and I'm also not moving because, you know, I couldn't move without the equity. So I feel like the discussion, and this, we get into this in the housing trap. I feel like the discussion about the trap part is something we almost have to live with, because neither, neither political party in our country would be willing to do things that would make housing prices go down there. We're never gonna The reason why I think Fannie and Freddie will be privatized is because it would allow, in the short term, the market to be juiced for housing a little more. And we seem like we're entering a period of time where we actually, I mean, I think it would be disaster, but I think looking at it from their standpoint, we need it right, like, there's not enough homes on the market, there's not enough buyers, there's, you know, this thing seems kind of stuck. The way you get it unstuck is to privatize it, allow it to become more risky, allow it to make riskier loans, longer bets, longer term mortgages, that would get the market unstuck. I think what you know is not really talked about is that Fannie Mae and Freddie Mac have on their books right now a really high percentage of non performing loans. Something like 11% of loans at Fannie Mae are in some state of delinquency. There was a report in The Wall Street Journal last month where you have up to a million homes that, as part of the more COVID pandemic relief, are having their mortgages paid and refinanced for them by the federal government. Most of, almost all of those are Fannie and Freddie mortgages. So there's a lot of people who, if that program ends, are going to lose their home very quickly. There's a lot of people that if this were privatized and had, you know, actual, like, market responses, would lose their homes very quickly. There's tension around all of that. And so, you know, if you said this is going to happen, I would say, Yeah, I think that's where both political parties would probably like to go. If this doesn't happen, it's going to be because the actual balance sheets of Fannie and Freddie are so bad in a rising interest rate environment with lots of delinquencies and no more COVID bailouts, these are companies that would not survive six months in a private sector. So I don't really know what's going to happen. I just know that this is one of the most messed up things. This is one of the most messed up things in our economy today. Fannie and Freddie are a disaster in so many ways.
Abby Newsham 27:52
So I mean, obviously the title of this article is kind of politicizing, you know, making this kind of a partisan discussion. And so I do have to ask, do you think that this is a partisan issue? Necessarily? You do say that both parties want housing prices to go up, right because it's such an important financial aspect of our economy. I mean, how do you think the political parties have have been thinking about privatization over the past several decades.
Chuck Marohn 28:28
It's really, it's really interesting, because there, I think if you go back to, like, the 80s or the 90s, there was an idea that, you know, the private market was going to be better at this and that, the more we could privatize it, the more we could deregulate it, the better things would be. I think you look at like the SNL crisis in the 1980s and what you see is an attempt to deregulate the housing market, with the government as the backstop. So, you know, you have all these banks that had FDIC or the SNL equivalent insurance, and they ran up huge, you know, massive, massive liabilities, and the taxpayers were forced to the tune of, you know, it was hundreds of billions at the time, which today it would be trillions. I mean, that's the way it worked, dollars of bailouts that were required to bring that under control. In the 90s, you had this kind of broad consensus between the two parties that the way we were actually going to do this, well, was to not necessarily deregulate, but decentralize. Use all these new tools of the internet, and, you know, the ability to create things like a credit score that would be less racist than an underwriter, but more, you you know, egalitarian. We could just look at your spending habits and kind of discern that, oh, you know, you might be in a. Bad neighborhood. But look, you're making your credit card payments so you can you're responsible with credit. And we saw how that, you know. And then take these, you know. And I'm going to say bipartisan again, you know, innovations of securitization, which began with Fannie and Freddie in the in the 1960s I mean, Ginnie Mae, the government entity, introduced the earliest securities. They were of really, really conservative loans, and they were only sold to like major banks. But the idea that you could take the risk of, let's say, 1000 high account, you know, high risk people aggregate them together and then say, is now low risk, because all of these high risks kind of cancel each other out. That's what securitization became under the system that that was a theory from Ivy League economists, you know, like we can make the economy work, extend capital to more people who are on the margins, who are shut out by the system, get them into loans. This was a Clinton era kind of innovation that then the Bush administration fully bought into. You know, this is how we look at, look at the robust housing market. It's, it's carrying everybody to prosperity. I think since, you know, since 2008 you can see the angst over Barack Obama's presidency, in historical terms, is he didn't go after the banks. The reality is, is there was nothing to go after. I mean, there were people who did things that were clearly like immoral. I think there were probably people who did things that were borderline illegal, but nothing that was so like, definitively, fraud. I take, I'm sure that there were, in aggregate, though, the thing that brought this thing down, I mean, like risky mortgage backed securities. You know, the things that aggregated into those were kind of like universally acceptable. It was like bad money driving out good money, and all that was left was bad money. I mean, that's what happens in a situation like this. When you sit here today, I think you hear, you hear Democrats lament una for you know, the lack of affordability you saw the Harris campaign really align themselves tightly with the yimby movement, and vice versa. Yimby is kind of identifying with Harris as you know, the candidate that was committed to building more housing and really using the levers of government to build more housing. But there was also a strong argument within the Trump campaign that they were about deregulating housing and deregulating Mortgage Finance. Both of these sides were actually saying the same thing with just a different emphasis. And the same thing was, how do we make it easier for people who can't afford homes today to be able to pay more for homes in the future and get into that housing. And you know, one side emphasized down payment assistance and government handouts to get people into houses, and the other side, the side that one emphasized cutting regulation and privatizing Fannie and Freddie so they could do riskier, longer term products,
Abby Newsham 33:24
yeah, to extend the length of that loan, which really means you're probably paying more interest at the end of the day after 50 years, right?
Chuck Marohn 33:33
Abby, what you just said is, like one of the largest understatements, if you actually ran the 50 year mortgage to its end. I think, like the first 20 years is just interest. I mean, it's, it's, it's the numbers actually don't work. I mean, then you, if you get into a 50 year mortgage, if that becomes a standard product, you are essentially just a debt slave at that point,
Abby Newsham 33:55
yeah, like you're not paying any equity, like you're you're not paying servitude, paying into debt loan for a very long time, unless you do so intentionally.
Chuck Marohn 34:04
But, but let's, let's make this clear historically. If we were in the 1930s and they came to you and said, You're going to take on a 30 year mortgage the the chuck and Abby at the time on a podcast, that Chuck would be saying, well, you're just going to be a debt slave. And that has become, like normalized for us, in a way that, you know, for my grandfather's generation, or my great grandfather's generation would have seen, seemed obscene to them, you know, just like obscene,
Abby Newsham 34:36
yeah? Well, I mean, it enables, it supports the inflation and housing, right? Like it supports the the costs that have gone up and they would like to continue to go up. So one, one more thing that I do want to ask you about is, do you think that this? Do you think that we're headed towards a scenario where we don't have. Fixed rate mortgages anymore,
Chuck Marohn 35:01
that would actually be a more stable scenario than otherwise. And I realize you ask that, like, oh, that sounds really risky, but what it would do is it would transfer the risk back to the buyer, and I think buyers, over time, would become more conservative. And again, I don't mean that politically. I mean that in terms like they would be more risk averse. And I think that that would actually yeah, for what they're buying. And I think that that risk aversion would actually reflect market reality more than just having the government assume that risk and have it be hidden from the market well.
Abby Newsham 35:36
And if Fannie Mae and Freddie Mac become privatized, maybe that would be the case, right?
Chuck Marohn 35:42
Yes. I mean, the way that Adjustable Rate Mortgages tend to work in our marketplace today is that they are generally used as, like, teaser rates to get people in and then, you know, switch over to fixed rates over time. It's almost like a marketing con, you know, like we it's like, you see in rental units today, like, we'll sign a 12 month lease and we'll give you the first four months free. Well, why don't you just, you know, reduce the rent by a third? And they're like, well, we can't do that, because then the bank won't refinance our loan. We have to actually rent it out at such a high price, or elsewise, you know, we've got to report lower earnings. It's a way to, like, game the system, to kind of make your balance sheet look better than it is. Yeah,
Abby Newsham 36:33
well, and optically, it would be a great way to say, hey, we lowered interest rates by giving you a 3% interest rate for the first couple of years, and then it changes,
Chuck Marohn 36:45
right? The banks don't I mean, I think what is, what is really clear, is that the bank can't lose money, or the bank goes away. The federal government has been able to, in a sense, backstop and absorb those losses only because we've been willing to or able to have massive budget deficits, not really care about it, not worry about the interest that we're paying on the federal debt, you know? And I realize that there's whole like, economic theories around the idea that those things don't matter. I'm not even going to debate that. I'm just going to say, like, it's, it's one thing to have those fantasies when interest rates for the federal government are less than 1% it's another thing when they're 5% and you're paying more on interest than you are. In defense, it does start to like in a real world sense, squeeze out other things. I don't think we're going back to low interest rates anytime soon. I mean, if you just look at the demographics of this country without financial problems, we're still looking at higher rates of inflation, wage inflation, just because we have fewer workers than we need. You throw in things like tariffs, you throw in things like, you know, financial chicanery, and, you know, all this stuff. And to me, it feels like we are in for a decade or two of you know, where we look back at this period of time we've been through of zero interest rates and say that is the anomaly, not the norm. That's yeah, that's the weird part, not what's normal. And if that is true, Abby, then home prices should adjust way, way way down, and wages should go way way up, and that would actually make things a lot more affordable for millennials. It would make life horrible for baby boomers.
Unknown Speaker 38:35
Oh, well,
Chuck Marohn 38:39
yeah, let me I say that not as a like, divisive thing, yeah, just to say that we, you and I live in a world today, all of our all of our American, you know, and even global listeners. We live in a world today that is a sense, been shaped by what is good for boomers, because they've been the dominant voting block. We are now moving into a world and I'm Gen X so like, no one gives a darn what I think or what's good for me. Like, we just don't matter.
Abby Newsham 39:11
Your opinion doesn't matter.
Chuck Marohn 39:12
No, there's not enough of us to matter. We're shifting into a world where the dominating voting block in America is millennials, and we are going to live in a world defined by their values, and it's unclear to me how their values will align with housing, especially with these constraints.
Abby Newsham 39:34
You know, right?
Chuck Marohn 39:37
Yeah, it's an open question. Will they continue to buy into the idea that prices should go up. If so, then I think you're talking about having people take on these longer term mortgages. If you think housing prices need to adjust, I think it could work out really well for millennials. But don't count on any inheritance, because it's all going to that equity is going to disappear overnight. Is as it probably should, because it's not real well
Abby Newsham 40:03
in the again, get to the question of, is home ownership? I mean, we created the idea of home ownership as the way, the primary way for families to build wealth. Is there another better financial model that isn't tied to housing, that that we could shift to, I would be open to that. I mean, I think building wealth is really important, but I do question whether this particular model of doing that is, is the best way of of of accomplishing that goal.
Chuck Marohn 40:37
Well, I don't know, is there's a better model. Currently, there's not No well, but throughout all of human history, I mean, people invested in a home, and that home became like their estate, their property. I mean, you can even go back to the Bible, and one of the reasons why you have, you know, hereditary succession, where like the oldest son is, this is because the oldest son inherited the estate and was expected to, like, look after everybody else in the family, right? You didn't subdivided up into small units, because then it would just get gobbled up by everybody else. You had to keep this big estate. There was wealth in your property. That's that's what it meant. I think the nuance today is that we can see how the stock market is. A lot about gambling on stocks, not the underlying performance of the company. And I think we can intuitively see that if you dig into the numbers, you see, you know, things like price to earning ratios way out of whack. You see, you know, reporting things way out of whack. You know, this idea of earnings after taxes and depreciation is an insane thing that in the 1990s and 1980s like no one would have reported on. But we do these propaganda things so like prop up stock prices. Today, the stock market is way over inflated, and it's crazy. It's crazy. Here's, I think, what people should understand your house price is more now functioning like a stock than it is like a home to build wealth. And what that means is that, yes, you've got upside, like it can grow by 10 20% a year, but it can also crash by 50% at any time, just like a stock will, just like, you know, Apple stock today is down 14% or something like that. You know, your house could fall overnight by by 14% and could fall by, you know, 50% in the next year, because that's what stocks do. So if you want that financial upside of a stock, you want that action like we want to juice this thing and make it go up, you're also going to have the volatility. Because the reason stocks go down, you know, there's a lot of like, market momentum reasons stocks go down, but at the end of the day, stocks go down, because stocks go up irrationally, and they go down irrationally, and they go all over the place irrationally.
Unknown Speaker 43:04
Yeah, and if
Chuck Marohn 43:07
you're building wealth, you don't, I mean, this is where, like, I look at my grandpa, and my grandpa's like, you know, what do you do with your money? Well, I put it in money market accounts or stick it under the mattress. And you're like, That's so old fashioned, you know grandpa, but my grandpa also lived through the Great Depression, and I think had an intuitive sense of like things that go up also go down. I don't want to be stuck in a thing that goes up and down. I think Americans today have this like unfounded faith in the stock market to be their friend, because in your life, Abby, in your lifetime. I mean, you could almost extend this to my lifetime, but I'm 51 you are like 22 or something, 31 okay, you know, we've got 20 in your lifetime. There has never been an instance where stocks went down that they didn't instantly go back up. That is not true in any other point of American history or human history. There's always like 40 year periods of time where stocks reach a high and then go down and take 20, 3040, years to go back up to where they were. Yeah. Do
Abby Newsham 44:21
you have any idea what it's like to live in a time where your whole life is an anomaly, just just a not anomaly after anomaly? It's like it is. I feel like Millennials or people younger than me have a sense of like, what is supposed to be normal.
Chuck Marohn 44:38
No, no, we, you know, you, you had that double, you know, double edged Chinese proverb, you know, may you live in interesting times. Who knows what history will say about us. But it does feel like we are living through things that are historic. And I do think that this is, you know, you can put the Trump administration and. These first kind of couple months of of chaos, really, in the context of the calm that we've had for a long period of time. We we've, we've had an abnormally long period of calm. And I think you like you say, well, millennials, we haven't, yeah, I realize you've had 2008 but 2008 was supposed to be really painful. And you know what it was? It was painful for millennials, but for for baby boomers, and really, for Gen Xers, it wasn't painful. Yeah, it was a bailout. There was a huge bailout of us now, you got outta college and couldn't find jobs and, like, you know, struggled and couldn't get into housing and all this. You know, COVID was supposed to be like that. Okay, now stuff's gonna hit the fan, and it's gonna get crazy, and we're gonna, you know, see, all this tumult didn't happen. There's massive bailouts of kind of every vested interest. At some point the vested interests shift, and they don't get bailed out the way that they used to. And I don't know if the chaos we're going through right now, is part of that shift or not, it's a thing that like pricks the bubble. But you know, we we live in a crazy, anomalous period of time,
Abby Newsham 46:14
yeah, yeah. But to your point, at the same time, relatively stable for relatively strong you'd like, it's very strange, because it is relatively stable despite the major events that have happened because of the bailouts. You know, there have been all these world events, these major events, and it's like, you know, I've been still going to my laptop every day. You know, it just hasn't look at the stock
Chuck Marohn 46:42
market from 1989 the end of the end of the Cold War, it's been nothing but up. Home prices have done nothing but up. Interest rates have gone nothing but down. Inflation's nothing but down and flat. We have lived through really like 30 plus years of the most stable, prosperous illusion of stability. And I'll say this in Nassim Taleb term, suppressed volatility is what we've had suppressed right? Yeah, suppressed volatility. Every time things get a little bit like the earthquake starts, we just suppress it. And so you build up, build up, build up, build up tension. And I, you know, is, is the Trump administration, the beginning of the Trump administration, the thing that pops the bubble and lets out the tension. Maybe we'll see, you know, but I'm looking at like apple. I've got Apple stock up on my computer right now, and just, you know, to me, Apple is one of these companies that, from a tariff standpoint, is going to get creamed, because Apple does 96% of its assembly overseas. They've tried really hard to get out of China, and they've reduced their dependence on China by like from 96% to like 92% I mean, it's like they they do not have a fallback. And if you have 80% tariffs on what they're doing, it dramatically changes their business model, even if we're all addicted to iPhones, you know, their stock price, you know, is at 188 today, it was last at 188 back in, you know, 2021 so it's dropped now back to where it was four years ago. Could it go back to where it was, you know, yeah. I mean, it was, you know, $5 a share in comparison back in 2010 I mean, could it go back to that? Yeah, easily. And that would still be like a massively successful company. It would just be like a very different company than it is now, right? Yeah, yeah, okay,
Abby Newsham 48:52
I'll, I'll leave it there. We've gone way off the weekend. No. I mean, this is, I'm not a finance person, so disclaimer, but I mean this is obviously unprecedented times and interesting to talk about how this all connects to the housing market. Before we finish today, I do want to do the down zone. This is the part of the show where we talk about anything that we have been up to lately that could be books, movies, shows, anything like that. So Chuck, I'm gonna put you on feel like
Chuck Marohn 49:27
I shared, I feel like I shared this with you last time. Okay, or maybe I've just done it in my brain many times. But I started reading earlier this year the three body problem. Yeah, we talked about this. Okay, I'm now almost done with the third book in the trilogy. This is the best this is some of the best fiction I've ever read. It is so good. And I know it's good fiction because I can see where the story is going. And I start to get like, I'm like, Okay, I. See this, and then, bam, it like tricks me, and it goes in a different direction, and not a different direction, that's like, implausible, a different direction, like, Oh, my God, I should have seen that coming. That's so obvious now. And then it does it again, and then it does it again. And I'm just like, I'm so into this book. It is so good. I'm on the third one now, which is called death's end. And I finally, and I'm gonna say this at the risk of people saying, Gosh, you're ignorant. I've finally gotten used to the Chinese names. I'm sure these names are beautiful and I'm sure they have deep nuance, but I am not familiar enough with Chinese names to be able to tell them all apart in the rate that they come at you. I mean, there's like, 100 characters in this series, and I'm like, Okay, I can't tell this person apart from this person, so I had to start taking notes. And be like, oh, yeah, keeping track. Keeping track. Because, like, the names are very similar to me. I'm sure it's like, John and Mark and James. Like, if you don't know English, like, what's the difference between those, those those names, yeah, what's the significance? I finally gotten it, and I finally feel like I'm in this book has been so good, like, just and I watched them. I watched the first season of the show. I know there's another season coming up. The book is infinitely I mean, just, like, not even compare, comparable, it is. So this is some of the best fiction I've ever read. And I mean, it won, it won all kinds of awards. I mean, it is award. I'm not saying like I've discovered this thing that no one else knows about, winner of the Hugo Award for Best Novel over a million copies sold in North America. New York Times calls it a mind bending epic. That's what it is. It's a mind it's mind bending. It is so cool. Yes, okay,
Abby Newsham 51:44
I've watched it, but I might have to add this, yeah, just,
Chuck Marohn 51:49
I just got through a part of the book where they encounter four dimensional space, and they describe four dimensional space and the experience of going through it. And I have to tell you, I have spent a lot of time in my life thinking about this, like, what does a fourth physical dimension look like? And I can't get my mind wrapped around it. And this book explained it in such a way that I feel like I can actually visualize it now that that level, okay, but he did that, and that's a geeky, science nerd thing, but he did it in a novel with human with human characters that was not nerdy and geeky. He just explained, he explained their emotions and what they were feeling and how they perceived it. And I'm like, This is This is sheer genius. This guy is so good at what he does. Yeah,
Abby Newsham 52:38
all right, you've sold me. I'm adding this, it'll be an audio book, though, because I I'm always moving around. So hopefully I'll enjoy it as much as I've been reading
Chuck Marohn 52:47
this one on my Kindle. And I, when I do audio books, I do a lot of them, and they are I'm absorbing things when I read. It's like a religious experience. And this book has been like that, like, I just, I, I can't wait to delve into it every night. So that's
Abby Newsham 53:05
awesome. Well, I mean aliens, that's like, Can't
Chuck Marohn 53:09
beat it.
Abby Newsham 53:10
Can't beat it. I totally, I don't you
Chuck Marohn 53:13
okay not to get spoilers, because people need to read it, but you don't know at the beginning that is aliens. Oh, sorry, no, you don't know at the beginning of the book, that is aliens. The thing that is, I think the most like mind blowing thing about this is that it uses physics as we understand it today, yes. And so the idea of, like, a message going out to this alien society that's four light years away, that it would take four light years to get there and four light years to get back is like a real thing that you have to deal with. They don't. It's not like Star Trek or Star Wars, where they go five parsecs in like two seconds. It's like, you know, time is real in terms of physics, and so it makes you have this deep appreciation for the vastness of space, because all of this happens, you know, over centuries, because that's how long it takes to actually, like, move through space, yeah, so good. Like, that's so so, so good. Yeah,
Abby Newsham 54:15
you've sold me Well, I guess what I what I've been watching lately is white lotus. Are you watching that Chuck?
Chuck Marohn 54:25
It is? It has become popular enough where I know what you're talking about, but not popular, not not like to where I'm actually watching it.
Abby Newsham 54:34
Well, that's really disappointing. I think you should really watch White Lotus. Okay. I mean, if you're interested in characters more than storyline, I think that that is, it's a great show. It's one of my favorite shows. For those who don't know what it is, it's about. It basically follows the guests and the employees at like, a five star. Resort in different places in the world, called the White Lotus. So first season is in Hawaii, second season is in Sicily, and the third season is in Thailand. And at the beginning of every season, you learn that somebody dies, and so throughout the entire season, you're trying to figure out who died, what happened, who murdered them? So it's kind of a murder mystery, but it's really about kind of the social dynamics between the gets, who are all kind of wealthy people, and all of their kind of worst tendencies come out throughout the week. So it's one of my favorite shows that I've ever watched. Chuck, I
Chuck Marohn 55:44
think, is it new characters every season? There's
Abby Newsham 55:46
a couple of through lines, but for the most part, yes, it's new characters every season.
Chuck Marohn 55:51
I mean, that's, it's interesting premise, because it would give you a lot of freedom as a writer to, you know, explore different people, exactly,
Abby Newsham 56:00
yeah, and exploring the relationship between the people who are visiting these places, in the locals, who are working in the resorts, and all of these different personalities and engagements between each other, and yeah, the guests interacting with each Other. It's really, it's really fascinating and very psychological. So, yeah, yeah, I highly recommend it. So
Chuck Marohn 56:26
I need to, I need to see I'm on my 90 day of not watching TV or doing any of that. So I, I will put it on my list. I have a few that are on my list now that after Easter I will be indulging in I will add this to the list. You've never let me down in the past. Abby, so I
Abby Newsham 56:45
don't think that you will be let down by this. You can choose to watch just the third season, which is what it what's on now, but if you really want to dedicate the time, I would recommend starting at the first season and watching it all the way through. But because it is different characters, you really can watch them as a standalone season. There's a couple of things that you'll miss, because there is a bigger picture story, but there are also smaller stories within each season. So
Chuck Marohn 57:17
all right, I feel like, I feel like, when Peaky Blinders, the movie comes out that I have to come to Kansas City and watch it with you.
Abby Newsham 57:23
Yes, I love the Peaky Blinders. Well, you
Chuck Marohn 57:27
You were the one who told me I needed to watch that. It was really, really good. It's a great show. I feel like, you know, because there is a movie coming out, right? I didn't know that actually. Oh yeah, no, there's a movie coming out, a Peaky Blinders movie. So when that happens, I feel like you and I need to, need to go to that
Abby Newsham 57:45
with silly and Morphe, yeah, wow, okay, yeah, totally, okay. We'll make it a plan. All right, thanks everyone. You're listening to another episode of up sound and Thanks, Chuck. I'll see you next time. Hey,
Chuck Marohn 58:01
thank you. Hopefully soon. Yeah, talk to you soon.
Abby Newsham 58:04
Bye.
ADDITIONAL SHOW NOTES
“How Trump plans to get government out of the mortgage business” by Paige Sutherland and Meghna Chakrabarti, WBUR On Point (March 2025).
Abby Newsham (X/Twitter).
Chuck Marohn (Substack)
Charles Marohn (known as “Chuck” to friends and colleagues) is the founder and president of Strong Towns and the bestselling author of “Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis.” With decades of experience as a land use planner and civil engineer, Marohn is on a mission to help cities and towns become stronger and more prosperous. He spreads the Strong Towns message through in-person presentations, the Strong Towns Podcast, and his books and articles. In recognition of his efforts and impact, Planetizen named him one of the 15 Most Influential Urbanists of all time in 2017 and 2023.