Taking the Temperature of the Housing Market

As COO of Fannie Mae, Kimberly Johnson '00 may be among the first to know if the US housing market shows signs of another crisis.

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A decade ago, as the subprime mortgage meltdown escalated into a national crisis, Kimberly Johnson ’00 sat at the center of the storm.

She had recently joined the Federal National Mortgage Association, or Fannie Mae, which suddenly was on the brink of bankruptcy as the real estate bubble popped and Americans began defaulting on their home loans. With more than $1 trillion in assets at the time, the mortgage giant held nearly one-quarter of total US housing debt.

Amid fears of global economic collapse if Fannie Mae fell, the US government took control of the company and injected approximately $116 billion to keep it afloat. The whirlwind of events caught almost everybody off guard, but in that was a lesson for Johnson. Recalling the fable of the naive frog that doesn’t sense it’s in a pot of water slowly rising to a boil, Johnson has since made it a practice to regularly gauge the temperature inside the pot, so to speak.

“It was a real lesson that no matter where you are in your career, you need to take a step back and look at things through fresh eyes,” she says. Johnson is now in her seventh role with Fannie May in 12 years, a steady career progression that landed her the position of COO, which she assumed in March 2018 after serving as chief risk officer and, before that, as chief credit officer.

Columbia Business spoke with Johnson about her outlook for the 2019 housing market and her new role at Fannie Mae. As COO, Johnson leads Fannie Mae’s technology, operations, data, modeling, and innovation, and oversees enterprise models and management. She is also in charge of resiliency—the firm’s ability to withstand another crisis. Johnson lives in McLean, Virginia, with her husband and two daughters, ages 11 and 13. At the Business School, she was chair of the Black Business Students Association and business manager of the Bottom Line, the former daily newspaper. She earned her undergraduate degree in economics from Princeton University, where she also led the rugby team to a national championship.

Did any lessons from the rugby field carry over to your professional career?

Joining the rugby team was one of the most pivotal experiences that I’d ever had, because it was something completely unexpected. I’d been a soccer player my whole life, and being able to recognize that those skills were transferable in ways that aren’t always obvious was the great first step to taking a risk and trying something new. We were not the most athletic or the best-coached players, but what we had was terrific teamwork and a good strategy. Every single person had a role to play as best they could. I was the scrum half [like the quarterback in football]. I spent most of my time reading the defense and making a plan for what play we were going to run three plays later. 

In a parallel way, do you see your role at Fannie Mae as, in a sense, defending the American dream of homeownership? 

The American dream is not just about homeownership; it’s about having a place to call home. Fannie Mae helps support homeownership through our single-family housing program. We also support multifamily apartment rentals. A huge number of Americans need an affordable place to rent, so we help finance apartment buildings as well. 

We think about making sure that we can provide that liquidity and home financing in all markets at all times, which requires playing offense as much as playing defense—thinking about what’s around the corner, and how we make sure that our home buyers, as borrowers and renters, are also prepared to weather all the storms that are coming. 

Talking about economic storms, Fannie Mae's reputation took a beating during the 2008 financial crisis. What has been done to restore it?

It’s hard to be the largest mortgage company in the world and go through a mortgage crisis without taking a few hits to your reputation. But we took specific steps to ensure that we rebuilt trust and confidence with the American people. We made efforts to change our business mix to focus on only the most stable types of incomes that we could generate. We built out our enterprise risk-management function, which I had the honor of leading in my last role. 

We’re putting in place better data and controls so that we don’t have the same kind of fraud and abuse that we had with our systems before. In terms of digitizing the mortgage market—making it easier to track and monitor and easier to use—I think our new reputation has really become one of a technology leader and an ecosystem builder. 

Are you confident these new safeguards and protections are sufficient? 

The problem with crises is that no two are ever the same, so to say that I am confident that we have all the right safeguards in place to prevent a crisis would probably be overstepping. We are well prepared for the typical business cycle that has recessions and expansions. 

But something unforeseen and precipitous and calamitous—who can guess what that might be? The best we can do to prepare is to look broadly, try to connect the dots, understand how these things impact each other, and ensure that we have the right monitoring and escalation and protocols so that we can get early detection. 

What could potentially signal to you that another crisis is on the horizon?

Every business cycle has peaks and valleys. This is the second-longest expansion that we’ve had since World War II. Everything that goes up eventually must come down. So, prepare for the market to turn. That doesn’t mean we’re going to have another crisis—every recession is not the Great Recession. But I do think that we need to be prepared for some recessionary pressures. We’re seeing rising interest rates, monetary policy tightening, and that’s going to change the growth rate and the way that people can borrow. It’s going to change their ability to finance homes. 

Do you see comparisons to the lead-up to the last crisis?

I think it is really different. Before, loose monetary policy drove up home prices. Now, we’re seeing home prices driven by a lack of housing supply. We’re seeing more demand in urban areas. Plus, demand for the types of housing is changing. You’re looking at micro-units and apartments and all kinds of different things to cater to a new millennial home dweller. We’re paying a lot of attention to where people live, and how they live, and ensuring that we are bringing liquidity in financing to the right place at the right time. 

Some of the real constraints are around things like the labor force—it’s hard to build homes without skilled labor. And the demographics of the baby boomers mean that lots of people are renovating and staying in place instead of creating new houses for first-time home buyers. These supply shifts are what make this really different than in the 2006– 2007 time period. 

Any other trends coming down the pike in 2019?

I love all the green financing that we’re doing. We provide incentives and discounts to apartment financiers who do things to improve water and energy efficiency. We finance upgrades in apartment buildings to capture more energy efficiency, which get passed on to renters as the utility costs are lower. We think that’s a terrific way to bring affordability into the rental space. That program in the last three years has gone from issuing about $400 million a year to more than $31 billion, making us the largest green bond issuer in the world. 

Tell us about your work promoting diversity at Fannie Mae.

Historically, homeownership has been a way for Americans to build equity and multigenerational wealth. We want to make sure there’s equal access for all people to have that opportunity, so we take proactive measures to make it easier for people to begin down the homeownership path. 

Many of our loan documents are available in multiple languages. We have first-time home-buyer programs. We have affordability programs that have home-buyer education attached to them; education is a great way to level the playing field. We have to think holistically about what we offer and how we offer it to ensure that we’re not discriminating against people in ways that we don’t even consider. 

What is something from your business school experience that you've brought into your work life?

I loved my statistics class with Professor David Juran [senior lecturer in discipline in business, Decision, Risk, and Operations Division]. He had an amazing way of connecting stories in real life to math. It led me to take classes around things like options pricing, securities valuation, and my all-time favorite, decision models. That frame of thinking has helped me connect an analytical perspective with a humanistic element. 

Faculty Research

Indexing housing debt to local home prices could be a way to prevent another mortgage crisis, according to Stijn Van Nieuwerburgh, the Earle W. Kazis and Benjamin Schore Professor of Real Estate. In a working paper, Van Nieuwerburgh and his co-authors argue for the shared appreciation mortgage (SAM), in which housing debt falls in line with any decline in home value. In the event of a crash, homeowners’ payback amounts would also fall, preventing mortgages from going underwater. When carefully constructed, he says, indexing mortgage payments to house prices would not jeopardize mortgage lenders’ stability. Read more.

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