Is this the best of times or the worst of times for home equity lenders?

It may be both, because some players in the industry are doing well while others are troubled.

Overall, volume climbed 8% last year and appears to be increasing by another 8% or so this year. But most of the big gains have been by the larger companies that specialize in home equity and subprime lending. Many of them had hefty originations gains last year and are continuing to rack up strong volume this year.

A sampling: Associates, up 22% in 1998; Household, up 77%; Advanta and GreenTree, both up 50%,

Banks and thrifts that hold their loans in portfolio-and do not report separate originations figures for first and second mortgages-showed little change in their direct holdings of equity loans last year. With interest rates low and prepayments draining portfolios, holdings of whole loans by depositories were flat despite probable increases in lending volume.

Banks increased their portfolios by about three-quarters of 1%, entirely on the strength of a 5.52% gain in closed-end loans. Funded open-end loans dropped by 1.44%. The figures do not include home equity-backed securities.

Credit quality on subprime loans, meanwhile, continued to decline throughout 1998, with serious delinquencies reaching their highest levels in December. According to Mortgage Information Corp., loans made in 1998 were performing worse than those made in 1997, seemingly an anomaly as lenders report tightening credit standards for the last year or two.

Clearly, the industry is being reshaped. The big specialists are thriving again after a wave of bankruptcies scaled down the competition.

The list of bankruptcies is a long one. It includes United Companies Financial Corp., FirstPlus Financial Inc., MCA, Wilshire Financial Services Group, Cityscape Financial Corp., and Southern Pacific Funding Corp.

Large banks have bought some of the big players, and more mergers are expected, with few if any of the top specialists regarded as immune.

The biggest home equity lender, Associates First Capital, may be an exception (see article, page 6A). The company is a rarity in being a nonbank that is also a portfolio lender. As such, it has an imposing balance sheet that might be hard for any acquirer to swallow.

Associates is vying with Household International for the No. 1 rank in home equity lending, but so far Associates has a big lead with $8.86 billion in originations last year, to $6.96 billion for Household. But Household is trying hard to close the gap as it integrates its acquisition of Beneficial.

Meanwhile, Residential Funding Corp., a unit of GMAC Mortgage Corp., is actively pursuing loans with high loan-to-value ratios despite the failure of FirstPlus, which specialized in such loans (see article, page 10A). And it is finding a ready market for securities backed by such loans, an indication that the secondary market for high-LTV paper has revived after last fall's debacle.

Experts say the high-LTV lenders have tightened their credit standards in the last few years, and that the loans should perform much better than those made earlier.

One bank-owned company that is thriving on home equity lending is the Norwest Mortgage unit of Wells Fargo & Co. (see article, page 4A). Doreen Woo Ho, executive vice president in charge of consumer debt, said the Wells merger provided an opportunity to focus more tightly on home equity. The company wants to do whatever is necessary to become a leader in home equity finance.

Wells Fargo's portfolio of home equity and subprime loans is $14.5 billion, second only to Bank of America's.

A smaller lender that is prospering where others have foundered is Empire Funding, based in Dallas. The company takes pains to distinguish itself from subprime lenders (see article, page 8A). "We're making consumer loans that don't depend on someone's equity in a house but on his or her credit history." said Gary W. Bradford, Empire's president and chief executive.

Empire had to sever a relationship with Contifinancial, which had its own financial problems, to get back on track with its own program. Conti was eventually bought by Residential Funding Corp. saving it from potential default on $500 million of bank loans.

For its part, RFC, a unit of GMAC Mortgage Corp., is also ignoring recent failures and going full steam ahead in making loans up to 125% of the value of a home (see article, page 10A). It is expecting $2 billion in volume this year and says it is confident that its high credit standards will assure good performance of the loans even in an economic downturn.

RFC, a wholesaler, says banks have been showing increasing interest in making high-LTV loans and selling them for securitization by RFC.

Investors are finding that losses from high-LTV loans are smaller than from subprime loans now that credit standards have been tightened, so they are showing increasing willingness to buy high-LTV-backed securities.

Empire Funding sold a $250 million issue in May and Goleta Bank of Costa Mesa, Calif., later sold $100 million in a deal led by Prudential Securities. In March, Residential Funding Corp. floated a $231 million issue insured by Ambac.

One nonfinancial problem still hovers over the home equity industry: accusations of predatory lending that have drawn extensive attention from regulators and legislators. The accusers contend that lenders deliberately make loans to elderly or naive people who cannot afford them.

In a commentary on the problem, Hugh Miller, head of Delta Funding Corp., urges lenders to rebut the charges.

"One of their favorite accusations," Mr. Miller writes, "is that lenders profit when they foreclose on borrowers' homes and therefore there is a strong incentive for lenders to originate loans they believe will be foreclosed. While we in the industry know this to be false, even ludicrous, the idea has gained widespread acceptance through relentless repetition."

Summing up, the home equity business appears to be healthy again, with last fall's crisis weeding out the weakest competitors. While prepayments have been high, loan demand continues strong, and investor appetite for equity-backed paper has been renewed.

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