Friday, December 25, 2009

Improving government revenues

From a US Statistical Abstract: there are about 75 million homes in America with about 48 million mortgages. At an average value of just over $100,000 the total amount of money borrowed in the form of mortgages is 5.4 trillion dollars.

The U.S. federal reserve provides 90% of this loan money, so the U.S. federal reserve has loaned out about 4.5 trillion dollars to pay home sellers on behalf of a home buyer and the commercial bank that they chose. The federal reserve charges the commercial bank a low interest rate to lend them 90% of the cost of everyone's mortgage. The commercial bank increases the interest rate they charge the customer without adding any real benefit to that 90% of the mortgage money that they borrowed from the federal reserve. If the federal reserve were to simply loan that money directly to the Amercian citizen then they could charge the citizen an interest rate below the commercial bank rate which would make the citizen happy. The amount they charge the citizen could also be more than what the federal reserve charges the commercial banks at present - which could generate badly needed government revenue (an extra 1% on 5.4 trillion dollars is about 50 billion dollars a year - nothing to sneeze at). The only one who loses are the commercial banks, but I don't think politicians should worry - there are only so many banker's votes out there.

I'm actually Canadian and would love to see the same thing happen here but I got onto the topic after finding the American mortgage statistics I showed at the top.

It might be best if this problem were solved with free market economics rather than having the government get into the mortgage and loans business. The mortgage and loan company of the future could consist of 2 computer systems and almost no staff (one computer system on the internet which takes mortgage and loan applications, one computer system analyzes the applications with actuarial mathematics to decide which applications to fund). A potentially very profitable business with low overhead which could heavily undercut the interest rates charged by the commercial banks.