MORTGAGE revenue bonds, the tax-exempt securities that states and localities use to finance home mortgages, have been a terrific deal for upper-bracket bond buyers. But they haven't been such a good deal for either the moderate-income home buyer, their ostensible beneficiary, or the federal government. Sen. Robert Dole has come up with a way to make the program work better for both the home buyer and the Treasury.

Mortgage revenue bonds have been an attractive investment because they pay interest at a rate only a couple of percentage points less than that paid on taxable mortgage-backed securities, yet allow the investor to avoid paying federal income tax on his interest. For a top-bracket investor, this could mean an effective return over 60 percent better than on a taxable bond. The fact that the bonds pay slightly lower interest enables the issuing state or locality to offer mortgages somewhat below market rates. But total home-buyer benefits are relatively small compared with revenue lost to the federal government because of the large windfall for high-income bond buyers and because part of the bond sale proceeds must be used to cover issuance costs and reserves.

The plan proposed by Sen. Dole, Sen. Russell Long and four other senior senators would save up to 40 percent of the current cost of revenue bonds and improve benefits for home buyers at the same time. The strategy is simply to eliminate the middlemen--the bond buyers and issuers--who now cream off much of the benefits. Instead of issuing all or part of their bond allocations, states and localities could choose to issue certificates to eligible home buyers. These would allow the buyers to claim a credit against their federal income tax equivalent to a refund of between 10 and 50 percent of their mortgage interest costs.

The plan would benefit needy home buyers not only because the average subsidy would be higher, but because states would have more flexibility in targeting benefits on those who really need them. Mortgage revenue bond subsidies, by contrast, frequently benefit home buyers who could afford to buy homes without help and, because of their design, are worth more to people who can afford to buy more expensive houses.

The plan also offers direct benefits to states and localities. By flooding the tax-exempt market with mortgage revenue and other private-purpose bonds, these governments have been driving up the cost of more necessary state and municipal borrowing. And, by eroding federal revenues, they have been adding to the deficit, thus driving up interest rates for all borrowers and increasing pressure to cut other forms of federal aid. Ideally, Congress should eliminate mortgage revenue bonds altogether. But the Dole plan would at least offer an option that, if they are truly concerned about helping home buyers, states and localities will find hard to resist.