In its recent annual survey on member nations’ economies, the Organization for Economic Cooperation and Development (OECD) briefly weighed in on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform, recommending that the US government reduce its involvement in the secondary mortgage market and noting that the Crapo-Johnson proposal would make an explicit government guarantee that is almost unheard of among OECD nations.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA) Bove

‘Fannie Mae, Freddie Mac reform is needed to lower risk’: OECD

“Recent stress tests mandated by the Dodd-Frank Act have suggested that [Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)] would require between USD 84 billion and USD 190 billion from the Treasury Department under adverse scenarios. Reform is thus needed to lower risk and to reduce the government’s role in the mortgage market,” the OECD writes. “Johnson-Crapo GSE reform seeks to reduce the risk to public finances by ensuring that private capital takes a bigger role in the mortgage market but leaves in place a government backstop, which is rarely found in other OECD countries, and represent a contingent liability for the federal budget.”

Fannie Mae, Freddie Mac Budget deficit

As an organization founded to support free market economies, you’d expect the OECD to recommend a smaller government role, but how to accomplish this is a major part of the debate on GSE reform. One way to reduce risk would be to recapitalize Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (whether this is a realistic option has recently been a matter of debate) or simply wind them down and let the housing market land where it may. A government backstop, explicit or implicit, may be rare among OECD countries but so is the ease with which middle class people can get 30-year mortgages instead of balloon loans or simply being expected to rent.

Fannie Freddie OECD household debt

Crapo-Johnson lost Senate support for not being involved enough

Ironically, the Crapo-Johnson proposal has stalled out because its approach the US mortgage market was too hands off, and Democratic senators like Elizabeth Warren and Chuck Schumer were concerned that it wouldn’t do enough to support working class ownership. But even if the bill had been changed to their liking it wouldn’t have made it through the House.

This tension between wanting to reduce public liabilities on the one hand and support home ownership on the other goes to the heart of the debate over Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform, and the OECD has made it clear that it cares more about the former than the latter.