George Bailey, Where Have You Gone?

Once upon a time, banks and thrifts served the important function of intermediating savings deposits and home mortgage loans. Those days are gone. My shiny new Mortgage Market Statistical Annual reveals that 86% of all mortgages, first and second, in 2009 were funded by securitization, not by bank deposits. Out of $1.8 trillion in mortgages last year, banks and loan companies funded $80 billion in conforming first mortgages, $92 billion in jumbo loans, $10 billion in subprime mortgages and $77 billion in second mortgages and home equity lines. The securitization market was totally dominated by FNMA and Freddie Mac, with private market securitizations accounting for about 3% of mortgage-backed securities.

In other words, without Fannie and Freddie (and the Federal Reserve to buy their mortgage-backed securities),we would have a catastrophic shortage of mortgage capital. Whatever you may think about the future role of Fannie and Freddie, they have provided a vital backstop to the moribund private capital markets in the current crisis.

Total bank deposits in the US, according to the FDIC, are at about $7 trillion, so what are banks doing with their deposits? Funding credit cards, home equity lines of credit, and commercial loans, among other things. Oh and also buying mortgage-backed securities.