Interviewing Fannie Mae's Senior VP Doug Duncan

By Christina Suter on Jul 28, 2018 at 05:00 AM in Real Estate Issues
Interviewing Fannie Mae's Senior VP Doug Duncan

Douglas G. Duncan is the Senior Vice President of the Federal National Mortgage Association, known as Fannie Mae, and he is a Chief Economist. Doug is responsible for providing all forecasts and analyses on the economy, housing, and mortgage markets for Fannie Mae. Duncan also oversees corporate strategy and is responsible for strategic research regarding external factors and their potential impact on the company and the housing industry. He serves as the Chair of the Fannie Mae Corporate House Price Forecast Committee.

I had the pleasure of interviewing Doug for my Ask Christina First radio show and I want to share some of his insights here with my blog readers.

Christina: "What does your position in the economy mean to you personally? What did you go through to get where you are as far as a career path and what was your personal growth experience?"

Doug: "I grew up on a dairy farm and we were, by American standards, poor. My father made sure that my siblings and I each spent a year as treasurer of our local friar’s club so that we could learn how to handle other people’s money. He made it very clear that there was a high standard of doing that and that carried forward in life for me and I maintained that high standard and integrity in which I do that now. Because Fannie is as large as it is I am careful not to state something as fact that’s just my opinion and I try to tie statements to the data that’s the basis for that statement. People began to trust us, me, and my team, despite getting a few things wrong, but in terms of career I never planned on being a chief economist of anything. I wanted to be a financial analysis and I liked banking and when I was on Wall St a housing opportunity came along and since I figured there will always be real estate I got interested in it. I’ve been very fortunate, had some terrific mentors, and I greatly appreciate that."

Christina: "What does Fannie Mae do? What does Fannie Mae believe it does?"

Doug: "Fannie Mae is about 30% of the total finance portion of the market, they have about 15-17 million loans in their portfolio across the country. Fannie Mae has provided liquidity for people to take out mortgages or refinance their mortgages.

The easiest way to think of us is to think of us as a large insurance company. If you take out a mortgage to buy a house or refinance a house with a local lender, Fannie Mae will either buy that loan from them and package it with a bunch of other loans and buy a security where we guarantee investors that we will forward the principle and interest to them on that security even if the borrower doesn’t pay. Other larger institutions issue their own securities and then we will offer to ensure that to investors so they pay us an insurance premium called a guaranteed fee.

In doing that we can make choices about what we’re willing to insure, so what Fannie thinks of itself as is a firm who’s providing broad liquidity in the economy for lenders of many different kinds. So we research consumers, try to understand the differences between them and what they might need and support the product offerings that lenders make to meet those needs. We also see ourselves as serving the social purpose through the economy. On the social side, we’ve recently released a mortgage called “Home Ready”. The characteristics of that loan, for the first time, allow the borrower, who may have other members of that family or maybe a boarder who have been long-term residents in the property to allow them to include their income in the qualifying of the mortgage. About ¾ of the household formation in the US going forward, is going to be racial and ethnic minorities, and some of those groups have different extended families in the household, so we’re trying to adapt to the changing society.

A commercial bank has to satisfy its regulators by having a diversified portfolio so that all their risks aren’t concentrated. In the history of commercial banking, the share of their portfolio of loans they hold, which are single-family mortgages, are 15-20% of their assets. So if we only relied on that and not the liquidity that’s provided by Fannie Mae, Freddie Mac, and Ginnie Mae in the secondary market, then the cost of housing credit would be higher and the availability of mortgage credit would be lower. The second thing is there is a whole other class of lenders, which go by mortgage banking companies, that don’t have portfolios so they couldn’t hold the loans even if they wanted to."

Christina: "You’re there to support the larger investors and hedge funds, but at the same time, as a company, your decisions affect what the market’s willing to do."

Doug: "As far as investors, the typical investor in residential real estate is a mom and pop kind of investor. People who’ve bought their first starter home expanded their family, then bought a second home and rented out the first one. It’s much more recent phenomena that private equity firms and institutional investors have gotten into that business. In my view, that’s because the price declines were so substantial that they recognized they could buy distress homes at enough of a discount to get high after-tax rates that they require as an investment firm.

Given the current demographic posture of the United States, the rental business is going to be a good business to be in for a while. The institutional investors I speak to, whereas when they first got into it, say 5 years ago, were thinking opportunistically, now are thinking that this is sort of a long run opportunity for them. Fannie Mae is in the multi-family space, 50 and above unit rental properties, but we’re not very important in the 4-50 and we’re trying to work on how we can help investors in that space."

Christina: "Where do you think the economy is going. There's talk about the interest rate increase, why do you think that's going to happen?"

Doug: "We expect the FED to make their first move in 9 years to increase rates slightly next week. We think they'll raise it a quarter of a point, which we don't think will have much effect on the housing market, but we think they will raise it again in March and then twice more next year in Septemeber and December. 

The Fed is going to be slow because they're going to be watching what happens with housing because a lot of the policies they've put in place have been targeted toward housing. The 30-year fixed rate mortgage a year from now will still be about 4.1%. Short interest rates will come up, global factors like Europe not yet recovering and the status of resource-intensive places like Canada, Brazil, and Australia, which have slowed down, means that capital will flow to the US and long-term interest rates will be held down as a result of that. We don't really see mortgage rates going up substantially but we think housing will slow a little bit because incomes haven't strengthened sufficiently to offset the rise in prices, which is driven by the failure of builders to ramp of building as fast as the household formation is taking place. House prices will still be appreciating at 5% nationally and in some markets much more than that." 

Christina: "Are we officially in a bear market?"

Doug: "One impact of the federal reserve monetary easing has been to move the stock market valuations higher. The economy this year will have grown just over 2%, which is not robust growth. I believe that part of what happened with the turmoil in early September before the federal reserves meeting was the assessment that China had slowed significantly so stocks related to China took some hits. Part of it also was the recognition among investors that if not then, the fed was soon going to raise rates and part of those valuations were a function of propping up by the fed. I'm not saying we're in a bear market, I'm not an investment advisor, but that's where I think the fed plays into it."