Hmmm… dumbest idea since sliced water.
The problem is, if a bank holds your mortgage - it means the bank will stop getting say, half your mortgage payment and also will only be able to count half your mortgage amount as an asset.
Some people seems to have the misguided idea that banks are a bunch of fat cats loaning out their own money at horrible interest rates, and it’s ok to take it all away and won’t hurt anyone. Not so. Banks take your money and my money - IRA’s and 401K’s (oer your local country’s equivalent retirement savings plan), any savings, etc. The reserve requirements are IIRC about 10% or less; this means when they get assets, they can lend money, and only have to keep 10% of it in relatvely liquid (easily sellable)assets. Most of their money is lent out again, with the understanding they are watching the balance between money out and in. Cancelling up to 50% of their assets, say, would be like declaring that they suddenly ahd 50% bad loans. Not good.
If you take away a huge amount of a bank’s assets, they cannot pay their bills. Other banks threaten to not honour their cheques and drafts, and want cash up front. Many businesses opeate on aline of credit. If the bank has to cancel the line of credit, because they no longer have the money to lend, or if they find that other banks stop honouring their cheques, then the whole business banking system falls apart.
Imagine if for every transaction you had to go to the originating bank. This is what banks do. You pay Visa, Visa remiburses its bank, which transfers to the merchants’ banks, and they eventually get reimbursed for the purchase you made. All those transfers are done in trust that at the end of the day, every bank will tally up what it owes/is owed and make it all even.
This is what was going to happen in 2008 - every bank was rumoured to be failing; each bank was wondering if they should accept a transfer from another, without cold hard cash in hand. The government had to step in and guarantee all suc transfers, which basically translates to covering the debts of overexposed banks.
So let a bunch of banks fail… Too many fail, FDIC goes broke, and the government has to step in. Your 401K is gone, except for the basic FDIC limit (not necessarily applicable, depending on how it was invested). The car makers went broke in 2008 because the banks would not make car loans, since they had no confidence they had the money to lend, or that some people would have the jobs to pay it back. This is the cascade effect. Any business that relies on people financing rather than paying cash is going to take a hit. Who pays the float on your VISA card? Maybe the bank will cancel it - they did that to quite a few customers in the last 3 years…
Mutual funds that hold bonds issued banks will lose a bundle That’s probably your pension plan. Then there’s the “getting there” issue. The longer the plan is discussed and debated, the worse it gets. The car loans are only half of it. If I think my mortgage will be cut in half, I will remortgage and take the cash and run. SO the banks will stop handing out mortgages until the issue is decided. How long does congress take to decide something? Hope you don’t have to buy or sell a house or get any major loan in that six months or more. It’s not like the banks have a magic mirror that says “Fred is honestly selling his property, Joe and Bill are just swapping properties and collecting the sales amount from the bank knowing they will not have to fully pay the resulting mortgages”.
Economics is like water. If you try to block or dam the flow one way, it will ooze out another direction and around until it flows where it was going in the first place.