Duane Duncan, chief economist of Fannie Mae, the mortgage giant that remains under conservatorship five years after being taken over in the run up to the 2008 episode of the ongoing financial crisis, spoke to the annual convention of the American Institute of Certified Public Accountants on Sept. 16.

Duncan's presentation was noteworthy for his lighthearted manner and for his succinct discussion of the issues pending as Congress considers mortgage banking reform. As significant as this legislation is to the future of Fannie, Duncan elected to wait until the Q&A period to discuss it.

This was the standard discussion of the housing outlook that housing economists give to journalists and conventioneers hundreds of time a year. This one was distinguished by being a bit more conservative than one would expect from an industry booster.

However, Duncan unwittingly called his expertise into question at the outset by shamelessly admitting that neither he nor most of his peers predicted the magnitude of the downturn in housing that occurred in 2008. (That is strange because there was plenty of evidence of it as early as 2005.)

Assuming that the housing market is about to return to a semblance of "normal," Duncan took up the challenge of defining what this will mean. He stated that five years after the 2008 episode, his personal expectations that economic performance would be below the estimates of the Federal Reserve have turned out to be true. Fannie has a good vantage point from which to observe consumer behavior, and from this point of view, while housing is gaining a firmer footing, its performance has not been robust.

The outlook for the overall economy is for 2 percent GDP growth this year and 2.5 percent growth next year, continuing a 10-year path of recovery from 2006. Duncan sees the pace of investment in technology and the value of such investments slowing. However, he sees four U.S. firms as among the worldwide leaders in this group: Google, Linked In, Facebook and Amazon.

In Duncan's view, the U.S. economy faces significant fiscal challenges, but housing is a tailwind.

Three quarters of subjects polled have responded that the country is on the wrong track with regard to the debt ceiling, and the public tends to respond negatively whenever this issue comes to the fore. The unemployment rate is not robust enough to support economic expansion. He said Fannie's forecast calls for tapering of quantitative easing to take place through the middle of 2014 (this speech happened before the announcement by the Federal Open Market Committee that it would not begin this month).

After Bernanke's comments in the spring, the yield on the 10-year Treasury increased by a full point, and the volatility of rates also increased. The tapering could last as long as 2020, and the reserve balances also have to be worked off.

Duncan noted that there was no evidence of inflation (choosing not to discuss the issue of how the inflation figures are reported). On two previous occasions when mortgage rates spiked, in 1994-95 and 1998-2000, demand for adjustable-rate mortgages also spiked, but that is unlikely to happen now.

Two things are different now as compared with those previous spikes — the size of the Fed's balance sheet and the advent of stricter underwriting standards. It is more difficult for applicants to qualify for mortgages and maintain houses.

Duncan recalled that he has made a more conservative estimate of housing construction for this year, at 950,000 units, which has turned out to be accurate, as opposed to the more popular estimate of 1.7 million, but construction has been restricted by difficulty in assembling the necessary factors of land, materials and labor. He mentioned that housing construction is an important contributor to GDP (but he neglected to point out that once the homes are built, housing is a drag, because they represent consumption rather than productive investment).

According to Duncan, 5 million homes are underwater. The current rising trend in prices has been due to restricted supply rather than to demand through household formation. Mortgage refinances have been declining, along with purchase applications, and processors have been laid off.

However, Duncan has a positive long-term outlook for economic growth, due to a boost from cheaper energy.

During the Q&A, Duncan was asked for his views on the use of eminent domain to restructure mortgages. He responded that the Federal Housing Finance Agency has opposed this, and Fannie has submitted a comment to the same effect.

He was then asked about the state of housing prices, and he said there are Don Ho-type "tiny bubbles."

On the subject of housing finance reform, Duncan referred to the Corker-Warner bill in the Senate, Fannie's interest in maintaining the 30-year, fixed-rate mortgage, with all of its existing features, and the importance of the so-called TBA market, which enables mortgage companies to lock down future rates.

Crucial questions are how much capital will be required, because undercapitalization led to the present conservatorship, but an increased capital requirement will increase the cost of mortgage credit. The whole enterprise will be backed in some form, either implicitly or explicitly, by the government.

I would observe that this is a very pithy statement of the case. However, to the extent that the proposals by the industry are based on maintaining the long-term, fixed-rate mortgage, this is the wrong objective, and to object to higher capital requirements on the ground that this will increase the cost of mortgage credit ignores the fact that the cheap credit on which the mortgage bubble depends caused both the mortgage bust and the 2008 crisis. Duncan probably realizes that this is true.