Over the past several days, before the U.S. Treasury Department acted to seize Fannie Mae and Freddie Mac, several people asked me if I thought it was a good idea for the government to “nationalize” the two mortgage giants. In virtually none of the coverage of the Bush administration's latest emergency action did anyone bother to tell the back story. Fannie Mae, nee the Federal National Mortgage Association, began life as a government invention. It was born “nationalized” -- and it worked beautifully until it was privatized.

FNMA was part of the New Deal’s trinity of housing agencies -- the other two being the Home Owners Loan Corporation and the FHA -- agencies that Roosevelt created in order to literally create the modern mortgage system. Before the New Deal, there were no long term, self-amortizing mortgages. The loan was due and payable at the end of the term -- usually five years -- and if you couldn’t persuade a bank or savings-and-loan to roll it over, you lost the house. After foreclosures exploded during the Depression, Roosevelt invented a whole new system. FNMA’s job was to buy approved mortgages from banks, to replenish their working capital, so that they could make more mortgages. As the biggest buyer, FNMA also maintained standards.

The system worked like a fine watch. Homeownership rates soared. Loan standards were generous but not stupid. Nobody in the home mortgage business got filthy rich. And mortgage lenders hardly ever went broke. The government’s bank insurance funds regularly turned a profit. And here’s a quaint, archaic concept: it operated in the public interest.

Then in 1968, as part of a general budget reform, government technocrats decided to get FNMA off the government’s books. This was intended as a purely technical revision. It was tacitly understood that Fannie was to keep doing the same thing it always did -- buy mortgages from banks, turn them into securities, keeps some, sell others, but maintain its standards and service to the public good.

It took about two decades for the wise guys to realize that there was big money to be made. And I am sorry to report that this was a bipartisan trough. In the Clinton era, many of the wiseguys at FNMA were Democrats.