In an article entitled "Fire the bazooka," The Economist, that unbelievably witty British weekly news mag, says it is "time to nationalise [i.e., nationalize] America's mortgage giants," namely Fannie Mae and Freddie Mac. The mag realizes that a government takeover would "technically add huge liabilities to the government's balance sheet" but quickly notes that "these would be offset by mortgage assets that are almost as large." What it doesn't say is that nobody wants those assets and that is why ole Freddie and Fannie are in such a pickle in the first place.
It IS possible for a government to run a mortgage office successfully. Before the American Revolution, several colonies, most notably Pennsylvania, sponsored "loan offices" or "land banks" that lent what were then large sums for long periods on the collateral of improved land and other hard assets. The loan offices were far from perfect. They usually lent for less than the going market rate so the quantity of mortgages demanded exceeded the quantity the government was willing to supply. In some places, like Massachusetts, some nasty political non-price rationing closed the gap. (Read corruption.) Also, if times were tough the government did not foreclose as vigorously as private lenders did. But maybe that was a virtue and that interest on the loans made other forms of taxation almost completely unnecessary in colonial Pennsylvania certainly was a good thing!
The Fed has always lent to member banks. Recently, in response to the subprime mess, it began lending to other types of financial institutions as well, in the name of financial system stability. The message it has sent is loud and clear and consistent with earlier pronouncements: get as big and risky as you want because we have your back. And so Fannie, Freddie, Indy, Bear, and many others did, and we and our kids are going to be asked to pay for it. Some people consider this arrangement unfair and it is difficult to argue with them.
Perhaps what we need is a Federal Loan Office (FLO) that will make mortgage loans to any bona fide American citizen for any 1 to 4 unit residential building that s/he can afford. (The IRS can help out with that one.)* The government's cost of funds is zero so it can set the interest rate where it pleases, higher to slow the economy down and lower to speed it up. The Fed would still control monetary policy, sterilizing mortgage flows with open market purchases or sales of Treasury bonds when necessary. All interest payments would be credited to the Treasury and the mortgage interest tax deduction would be eliminated. Like the Fed, the FLO would be a quasi-independent government "profit center" rather than an additional burden on the federal budget.
It could also be used to provide effective fiscal stimulus. Instead of sending out stimulus checks 6 times too small and 6 months too late, the government could use the mortgage loans to stimulate the economy quickly by telling borrowers, to wit most American families, that they need pay only half or some other fraction of their usual payments for the next x months. It could even pass a moratorium on all payments to combat particularly large shocks, postpone payments in disaster areas, and so forth. We'll have to think carefully, however, about how to spot and stop potential political abuses of these powers and there will be some tricky issues during the transition period.
*Mortgage loans should have two bases, the value of the mortgaged property and the borrower's income. The IRS knows Americans' income history better than anyone; perhaps people will think twice about cheating on their taxes if it affects their ability to obtain a mortgage. Assessments should be done by at least three randomly chosen local assessors.
