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.

Comments

[Charles D. Coppage]

As someone who has been doing residential real estate work for over 30 years, I am very nostalgic for the old hometown "save here,borrow here,pay here" savings and loans. They served a very vital role in making housing available to a great many of the citizens of this nation for well over a hundred years. They knew their customers and knew their markets,so that they usually had very few foreclosure problems. One S&L in a town where I used to practice had one foreclosure in an 18-20 year span of time because those running the institution knew how to avoid them, by allowing sale and assumptions or refinances when needed. Unfortunately,those days are gone,much to the fault of S&L's that wanted to be banks and make "big loans" on shopping centers and other commercial type loans. Also, in the 1980's, too many were run by people who treated the S&L's as private piggy banks and blew money on all sorts of things.(See Resolution Trust Corp.) Too many became "suppliers" to FANNIE andf FREDDIE because none wanted to live with a loan for 20-30 years. They didn't want to"make money the old fashioned way". They didn't "want to earn it".
In my opinion,FANNIE and FREDDIE should be dealing ONLY with government insured or backed loans such as FHA and VA loans. "Lender of last resort" loans. Everything else should be privately made and sold and S&Ls should be encouraged by allowing them to pay somewhat higher interest on savings as they were 30 years ago.