By Isobel Kennedy

NEW YORK (MNI) – The New York Federal Reserve bought $3.65
billion agency mortgage-backed securities in the week ended December 28.

The largest purchases in the latest week were in Fannie Mae and
Freddie Mac 30-year “to-be-announced” TBA securities with 3.50% coupons
for February delivery. Those buys totalled $1.850 billion.

The next largest purchases were $900 million Fannie Mae and Freddie
Mac 30-year TBAs with 4.00% coupon for January delivery.

In the previous week ended December 22, the NY Fed bought $8.75
billion similar MBS and the lesser amount this week is attributed to
half-staffing and an early close on Friday, December 23 and a full close
on Monday, December 26 for the Christmas holiday.

In this latest week, the NY Fed did not make any purchases or sales
of the TBA dollar rolls.

On December 20, the Federal Reserve released its Dodd-Frank
implementation proposal. Some of these requirements overlap with Basel
III and market players are still trying to interpret the Fed’s proposal.

Mortgage strategists at Morgan Stanley say the biggest question in
this proposal is what assets qualify as High Quality Liquid Assets and
whether they are Level 1 or Level 2.

Morgan Stanley says the Fed proposal proposal clearly implies that
Fannie Mae (FN), Freddie Mac (FH) and Ginnie Mae (GN) will be HQLA but
it does not mention Level 1 or 2.

Level 2 can make up a maximum of 40% of HQLA and require a minimum
15% haircut.

Morgan Stanley says the market assumes GN will have a 0% risk
weighting and FN and FH will have a 20% risk weighting as they currently
do under Basel II.

Most analysts doubt that FN and FH will get a 0% risk weighting
because they do not have a full government guarantee.

Last week, mortgage strategists at Credit Suisse said FN and FH
could “at best” become Level 1 assets because Fannie and Freddie
comprise a vast majority of agency MBS outstanding and that could deepen
the pool of eligible assets under the proposal.

But they will not get a 0% risk weighting, Credit Suisse said in a
research report.

The housing market has been struggling for years and some market
sources are hoping that the industry will finally hit bottom and start
to do better in 2012.

Some of the recently released data is turning more positive.

Last Friday, New Home Sales for November printed at +1.6% to 315k
about in-line with the MNI median estimate of 313k.

October new home sales were revised up to 310k from a previous
print of 307k and September was also revised up to 306k from a previous
303k.

The months supply of new homes fell 1.3% to 158k or a six months
supply, the lowest its been since there was a 5.9-months supply of new
homes in March 2006.

On Thursday, November NAR Pending Home Sales Index rose 7.3% to
100.1 vs 93.3r in October. This is its highest level in 19 month and its
best level since April 2010 when there was a homebuyer tax credit.

The Pending Home index is now up 5.9% year-over-year.

The NAR said the gains may partially result from delayed
transactions (rejected buyers recommitting) and from pent-up demand.

The data implies existing home sales should continue to improve
ahead, NAR added, and said the pending index was not affected by recent
rebenchmarking of existing-homes “because the pending index uses a
different methodology based directly on contract signings.”

Because of the ongoing holiday, the Mortgage Bankers Association
weekly application index was not published this week.

** Market News International New York Newsroom: 212-669-6430 **

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