The home-equity loan market declined further during the third quarter of 2011 as depository institutions reined in new production and their existing portfolios – in most cases – continued to wither. According to the Federal Reserve, the outstanding supply of home-equity loans – both closed-end second mortgages and lines of credit – fell to $887.5 billion as of the end of the third quarter. That was down 1.9 percent from the midway point in 2011 and off 21.5 percent from the HEL market’s all-time high of $1.131 trillion reached back in 2007. Most home-equity loans are held in portfolio by..(Includes two data charts)

The Countrywide Financial legacy continues to sour for Bank of America, which recently was compelled to agree to pay $335 million to settle charges that Countrywide allowed pricing discrimination against African American and Hispanic borrowers, along with unchecked steering to subprime loans, when similarly qualified Caucasian borrowers were given prime loans at lower cost. It’s the largest fair lending settlement to date. This is the first time that the Justice Department has alleged and obtained relief for borrowers who were steered into mortgages because of their race or national origin, government officials said. The settlement – which requires court approval – mandates that Countrywide implement policies and practices to prevent discrimination if it returns to the lending business during the next four years. Countrywide currently operates as a subsidiary of Bank of America but does not originate new loans.

Issuance of non-agency mortgage-backed securities supported by newly originated mortgages will remain muted in 2012, according to industry analysts. A number of factors have combined to limit non-agency MBS issuance, including economic issues, regulatory issues and uncertainty regarding reform of the government-sponsored enterprises. Only two non-agency securities backed by new loans were issued last year – a total of $665.2 million in jumbo MBS from Redwood Trust. “The trickle of deals should continue into 2012,” according to analysts ...

The Congressionally-mandated increase in the guarantee fees charged by the government-sponsored enterprises and the FHA will not be enough to significantly shift activity to the non-agency market, according to industry analysts. One option for increasing non-agency activity has been an increase in GSE guarantee fees, but the 10 basis point increase approved by Congress in December does not appear to be enough for most products. “The argument that it will encourage homeowners to look for non-GSE/FHA loans is pretty silly and hides the foolishness of using housing to pay for payroll tax cuts,” said Adam Levitin, an associate professor of law at Georgetown University. ...

The Consumer Financial Protection Bureau announced this week that it will immediately begin supervision of non-bank servicers and lenders. The supervision became possible due to President Obama’s controversially executed appointment of Richard Cordray as director of the CFPB. “Since most of these businesses are not used to any federal oversight, our new supervision program may be a challenge for them,” Cordray said this week of non-banks. “But we must establish clear standards of conduct so that all financial providers play by the rules.” ...

Bank of America and the Department of Justice recently agreed to the largest residential fair lending settlement in history – for $335 million. The DOJ claimed that Countrywide Financial allowed pricing discrimination against minority borrowers as well as unchecked steering to subprime loans. The settlement, which is subject to court approval, will mark the first time that the DOJ has obtained relief for borrowers who were steered into loans based on race or national origin. The DOJ said the practice “systematically placed borrowers of color into subprime mortgage loan products while placing non-Hispanic white borrowers with similar creditworthiness in prime loans.” ...

The government-sponsored enterprises’ increased subprime activity in the mid-part of the last decade was driven by compensation incentives for former executives, the Securities and Exchange Commission claims. The allegations were included in recent lawsuits filed by the SEC regarding Fannie Mae’s and Freddie Mac’s disclosure of non-prime activity. In December, the SEC filed securities fraud lawsuits against six former GSE executives. The SEC claims the executives – including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron – knew of and approved misleading statements in 2007 and 2008 claiming that the companies had minimal holdings of higher-risk mortgages. ...

The group of institutional investors that negotiated a potential $8.5 billion settlement with Bank of America has recently targeted other non-agency mortgage-backed security issuers. The move is the latest development in a number of ongoing claims regarding non-agency MBS. This week, the group led by the law firm of Gibbs & Bruns asked trustees to open investigations on more than $19.0 billion of non-agency MBS issued by Wells Fargo. The investors said they hold more than 25 percent of the voting rights in 48 trusts that issued the non-agency securities between 2005 and 2007. ...

In 2011, high-touch subprime servicer Carrington Mortgage Services significantly decreased its delinquency processing timelines and had its servicer rating confirmed at the end of the year. The servicer also made adjustments after facing criticism from non-agency mortgage-backed security investors who claimed that Carrington’s practices improperly favored investments made by the hedge fund that also owns the servicer. Carrington serviced $11.73 billion in subprime mortgages as of the end of the third quarter of 2011, according to estimates by Inside Nonconforming Markets. The servicer received a mid-range rating for subprime and special servicing from Fitch Ratings, with the rating service recently confirming that Carrington “demonstrates proficiency in overall servicing ability.” ...

Loan modifications with principal reduction have significantly increased in the past year, with servicers seeing improved performance compared with other types of mods. The mods remain concentrated on securitized non-agency mortgages as well as portfolio loans, but performance varies considerably. After falling to a 2.7 percent share in the fourth quarter of 2010, principal reduction mods have accounted for a growing share of bank and thrift mod activity, according to the Office of the Comptroller of the Currency. Principal reduction was used in 7.8 percent of the mods completed by nine major bank and thrift servicers in the third quarter of 2011. ...