The combined holdings of residential MBS by banks and thrifts topped the $1.5 trillion mark for the first time ever during the third quarter, as depository institutions without a lot of great alternative investment options continued to plow money into the market. Banks and thrifts held a record $1.533 trillion in residential MBS at the end of September, up 2.8 percent from the previous quarter and 10.4 percent ahead of the same period in 2010. Banks and thrifts held a combined 23.2 percent share of the outstanding residential MBS in the market. The biggest...(Includes two data charts)

The chief of enforcement at the Securities and Exchange Commission took issue with a U.S. District Court judge’s rejection this week of the agency’s proposed $285 million settlement with Citigroup over a collateralized debt obligation backed by MBS that went sour, and defended the deal as the best available course of action, given the restrictions under current law. Robert Khuzami, director of the SEC’s Division of Enforcement, responded to a ruling announced early this week by U.S. District Court Judge Jed Rakoff in Manhattan in which the judge rejected the multi-million-dollar...

Settlements regarding non-agency mortgage-backed securities are starting to increase as industry analysts suggest that the agreements limit the future liability faced by issuers. Bank of America and the Royal Bank of Scotland recently reached separate non-agency MBS settlements. At the end of October, BofA quietly settled with investors – including the Public Employees’ Retirement System of Mississippi – in 18 non-agency securities issued by Merrill Lynch. The settlement price was not disclosed but was reportedly $315.0 million. ...

The Department of Housing and Urban Development has reportedly offered to release major servicers from some liability related to FHA mortgages as part of a pending settlement related to foreclosure problems. While the offer may sweeten the deal for banks to settle with state attorneys general and federal regulators, observers say it’s not a total game changer. The complex negotiations have lasted more than a year, stemming from servicing practices that include robo-signing of foreclosure documents and poor communication with borrowers. A key sticking point has been...

The Federal Reserve Bank of New York will ask its primary dealers, as part of best practices, to raise their upfront cash collateral for MBS trades. A NY Fed spokesman denied that the change in collateral requirements was a reaction to the recent collapse of MF Global, a primary dealer. Since its last foray into the agency MBS business in 2010, the agency has been considering raising the margin for MBS deals, he said. The spokesman said a best practices guidance issued by the NY Fed’s Treasury Market Practices Group in September 2010 requires trading desks to consider...

The Federal Housing Finance Agency earlier this month issued a proposed rule to require the Federal Home Loan Banks to “monitor and assess the eligibility” of each Bank member for access to long-term advances through compliance with the Community Reinvestment Act and the member’s first-time homebuyer standards.To maintain access to FHLBank long-term credit and community investment products, Bank members are required to submit a community support statement to the FHFA every two years to document their CRA performance and record of lending to first-time homebuyers.

ABS issuers are scrambling to get a handle on complex new rules to mitigate conflicts of interest in the structured finance market that are being developed by the Securities and Exchange Commission and federal banking regulators. “At the end of the day, we’ll spend lots of time figuring out how to comply,” said Bianca Russo, managing director and associate general counsel at JPMorgan Chase, during a seminar sponsored last week by the American Securitization Forum. “It’s going to be a challenge to comply, however the rules turn out.” Complexity and consistency are...

A reduction to the Federal Home Loan Bank system’s advance business and investment portfolio would diminish Bank profitability, resulting in a credit negative for U.S. commercial banks, according to a recent report by Moody’s Investors Service. “Limiting access to FHLBank funding would reduce alternative liquidity for U.S. banks,” noted the Moody’s report “A Diminished Federal Home Loan Bank System Would Weaken U.S. Banks.”

For an all too brief moment last week there was bipartisanship on Capitol Hill as exasperated Democrats and Republicans took turns questioning and berating the CEOs of Fannie Mae and Freddie Mac and their regulator surrounding the issue of executive compensation at the two GSEs.Federal Housing Finance Agency Acting Director Edward DeMarco was called before the Senate Banking, Housing and Urban Affairs Committee and the House Committee on Oversight and Government Reform to explain some $13 million in performance bonuses to Fannie CEO Michael Williams and Freddie CEO Charles Haldeman and eight other senior executives at the taxpayer-subsidized firms.

Both Fannie Mae and Freddie Mac retained their hefty shares of mortgage-backed securities with something of a bump during the third quarter of 2011, according to a new Inside The GSEs analysis.The GSEs issued a combined $174.8 billion in MBS in the third quarter, a 12.8 percent increase from the second quarter. Compared to the third quarter of 2010, Fannie and Freddie saw an 11.2 percent decrease in MBS issuance during the first nine months of the year.