DS News

38 The Exchange Doug Duncan, SVP and Chief Economist, Fannie Mae, is responsible for forecasting and analysis of the economy and the housing and mortgage markets. He also oversees strategic research regarding the potential impact of external factors on the housing and mortgage markets. Duncan leads the House Price Forecast Working Group reporting to the Finance Committee. Duncan recently spoke to DS News on how the economic shutdown has impacted the industry, the response by the Federal Reserve, and how housing could rebound. How could another potential economic shutdown hinder housing's growth for the remainder of the year? What that does is extend the time to recovery for some small businesses, particularly restaurants and theaters. It, once again, calls into question their viability. e longer they go without reopening, the more they eat up of their existing capital and there is a greater potential that they can fail. If they fail, that means jobs are going to be lost, and those lost jobs result in lower income, which results in less consumption. If there was a significant broad-based downturn, you would get the W shaped growth path that you will have heard people talking about. If we see a broad-based downturn we would have to lower our forecast for growth this year and next year. When it comes to the virus, some people are using the word resurgence. From our perspective, what's actually happening is that the geography being most heavily impacted has changed. It's gone from the Northeast and the Northwest down to the South. It's moved regionally, but those areas which were first hit hardest have not seen a rebound yet. If we saw a resurgence in areas that were impacted first, then that would be considered a resurgence. We haven't really seen the resurgence yet. It has been more of a geographic shift. Could the U.S. economy withstand another large-scale economic shutdown? It can, but not without significant pain. Economic activity won't go away entirely. People still need to live, eat, have shelter, clothing. e basic needs will still have to be met somehow. Certainly, there would be some additional policy decisions made on how best to support the economy. But another large-scale shutdown would result in a deeper downturn than we have seen and bring about more serious employment and capital destruction. If this were to happen, it would take longer for a sustainable economic recovery to take place, and the potential growth path of the economy going forward would certainly be affected. As you see firms going bankrupt or closing permanently, that's all capital that is taken out of the system as investment and would have to be replaced over time. A shutdown would take us further down and it would take longer to get back on a path to recovery. What are your thoughts on the actions that the Federal Reserve has taken up at this point to stabilize the mortgage market? e 30-year fixed rate mortgage interest rate is just below 3% right now. Usually we look at the spread of mortgages over the 10-year Treasury. If you go back to April, that spread over the 10-year Treasury was 265 basis points. By June, that spread had narrowed to 243 basis points and you then started to see mortgage rates come down. e spread between mortgage rates and U.S. Treasury rates in June was still 60 basis points above the average for 2019—180 basis points. What that suggests is that there is still room for mortgage rates to come down. We do expect that they will come down. Why was this spread so wide? e huge ramp-up in demand for refinancing was a capacity problem for the mortgage industry. ey simply didn't have the capacity to process the volume of loan applications that rapidly because some of the normal processes in "The spread between mortgage rates and U.S. Treasury rates in June was still 60 basis points above the average for 2019—180 basis points. What that suggests is that there is still room for mortgage rates to come down." Doug Duncan SVP and Chief Economist, Fannie Mae Get to Know Industry Executives Beyond the Boardroom

• Cover