ValueWalk’s Raul Panganiban interviews Tim Pagliara, Founder, Chairman and CIO of CapWealth group and Grant Stark, CFA, director of research at CapWealth Group. In this part, Tim and Grant discuss ways to keep the housing market moving forward, and how they will impact the existing and potential shareholders.
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Raul Panganiban: Yeah. Getting back to the American people here, how do we incentivize people to continue to buy homes and keep the housing market moving forward, given that unemployment will rise in the short coming months and themselves, like the forbearance stuff? So long term view and then the short term view going forward?
Grant Stark: I'll just jump in first and say you certainly don't do it with mortgage rates that are 300 to 400 basis points higher than, than the baseline. Right. So that's sort of the the first obvious one and, and that's the low hanging fruit that Tim and I have discussed that we can that there is a solution to that and I would say to is you're right, the forbearance is very helpful in short term.
Long term, it really is going to be just ensuring that the rates are competitive and that individuals have the opportunity to get the credit they need. In fact, this is this is probably just just like, you know, if you watch CNBC or or one of the financial networks or read some the ValueWalk articles, you know that people have been saying and writers have been saying, this is one of these once in a lifetime opportunities or, you know, this happens every five times where you get these opportunities.
Well, it's the same thing for starting a family with a house or buying your first home or refinancing, where if we can get the rates competitive and fix that plumbing system with liquidity, which the GSEs can do, then it Americans will have the opportunity to generate significant wealth and start a stable family and start their first home with a competitive rate that would cost them you know, thousands less than it would have in this current environment. So to me, that's the path forward.
Tim Pagliara: And great point Grant, you know, the short term, it's getting rates down so that people that have the resources and we're going to close on a home anyway, have the courage to go forward and do it. And then then then longer term, you know, and I think you look at this, you know, three months, nine months, a year, two years out. I think that this crisis has imprinted the American people, they want some security.
And I think the people that own homes have found a tremendous amount of security in that and having a place of refuge. And so I believe that we have a unique opportunity through to keep the housing market moving and to accelerate the trend and household formation and the trend that delayed you know, household formation from the financial crisis is still big. So, you know, people in their 30s now are buying homes and they're having children. I know I've met grandchildren in the last two years, you know, And my son, and his wife, you know, they're in their, their mid 30s.
This is the time that they do it. And they're homeowners. And I think that if you provide quality financing that reflects the lower rates of interest, that that are out there, and that are likely to, to be there for a long time, then then, you know, it's a great opportunity, not only to serve the needs of the American people, but to housing I believe is you know, still 15 to 20% of the American economy and it gets that part of the economy moving with construction workers and in the materials and all the flow through in the supply chain that benefits from a strong housing market.
So it is a short term, near term and longer term solution that we should have in place now. We should have had it in place five years ago. We have all the information we need to get this done now.
Raul Panganiban: What does this mean for shareholders, potential shareholders as well?
Tim Pagliara: Well, it for existing shareholders, it's the end of a long journey that, you know, it's culminated in litigation and that has been, you know, after a long period of time very favourable to them. It is the right thing to do. What it does for the capital markets, it you know, there is a demand a huge demand for companies that have recurring long term profitability. Fine, Fannie Mae and Freddie Mac are two of the most profitable financial companies in the world and in their structure. We've talked about the unique place that they have in our financial system as a counter balancing force to the pro cyclical nature. No one's ever done it better.
They're part of the system. And there's no way out for that. So I think that with all the cash that's in the system, what you're going to see is that they can't keep it at zero forever. I mean, you know, pension funds, for example, they do annuity payouts, they have to have a return on their money, they are looking for high quality ways to invest their money once this crisis and liquidity needs are over.
And so I think what you do is you you create an opportunity for existing shareholders to invest more and the institutions that own these, you know, these, the current common and preferred, but you also create an opportunity to deploy some really smart capital that's limited to investing in companies that generate earnings and profits on a consistent bases.
Grant Stark: You know, I would just say when we, when we started looking at solutions to this, in 2013-2014, the goal was always to find a solution where everybody won. And, and it's sort of I look at it as writing an essay, it's, it's actually very easy to write a very long essay. As a writer, I'm sure Michelle would know this, that it's actually a lot more difficult to find a more nuanced way. And, and to write a shorter essay and, you know, get the same amount of information in there. It's the same thing for for structuring these agreements as an investor, that you're taking one side and there's always another side of something. So it's, it's a lot easier to find a solution that just works for you outright, versus works for multiple parties.
Keeping the housing market moving
And so I think that's why maybe it has taken longer than expected is, you know, everybody, everybody's trying to get to the point that we were trying to get to originally as you Let's find a win win for every fan.
So when you look at this, when you ask, you know, how does this work out for the investors, the beauty of this path forward is, it works out for us as investors, but it also works out for the government as investors. It also happens to work out for anybody who has a mortgage with them currently, it also works out for home people that want to buy homes today and in the future. So all constituents actually win in this scenario. And And to me, that's the beauty of the structure and that's why I think it makes sense to, to push forward on this and that's why they are pushing forward on this.
Tim Pagliara: Every everybody makes a little bit of sacrifice and the solution that we came up with and and it's, you know, it's brief, it's to Grant's point. It's that old thing. I didn't have time to write you a short letter, so I wrote you a long one. Now we have narrow road all of this down to the key issues that remain and get this, you know, $10 trillion mortgage market jumpstart it back on its feet.
And I think anybody that has been involved in this discussion in the last 10 to 12 years or recognise that and so everybody is taking a haircut except, you know, primarily that the government. I mean, the government stands to benefit greatly at this point because it increases a tremendous it puts a tremendous amount of money back into the system that they can use for relief from people that have suffered in this crisis.
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