By Isobel Kennedy

NEW YORK (MNI) – The New York Federal Reserve purchased $6.25
billion agency mortgage-backed securities in the week ended January 25.

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 $2.95 billion.

The next largest purchases were $1.25 billion Fannie Mae and
Freddie Mac 30-year TBAs with 4.00% coupon for February delivery.

The NY Fed conducted no TBA dollar roll trades in the latest week.

The Federal Reserve caught the bond markets off guard Wednesday
when it said it expected rates to stay “exceptionally low” until late
2014, a significant lengthening from the previous “until mid-2013.”

While the forecasts of the 17 individual members of the committee
showed that some thought rates hikes might be appropriate later in 2012
and 2013, the statement ruled market direction and rates fell sharply,
led by the belly of the curve.

Spreads in the agency mortgage-backed-securities market tightened
Wednesday and Thursday as the demand for carry increased and spread
product was in high demand.

Market sources also noted that the Fed may have to do more
quantitative easing this year and most experts fully believe that MBS
will play a crucial role in any QE3.

Because it is an election year, sources also suspect that any QE3
program would have to be initiated in the first half of this year to
avoid criticism of political motivations.

President Barack Obama also made waves Tuesday night when he said
during his State of the Union address: “That’s why I’m sending this
Congress a plan that gives every responsible homeowner the chance to
save about $3,000 a year on their mortgage, by refinancing at
historically low interest rates. No more red tape. No more runaround
from the banks. A small fee on the largest financial institutions will
ensure that it won’t add to the deficit, and will give banks that were
rescued by taxpayers a chance to repay a deficit of trust.”

While some in the market dismissed the remark as political
rhetoric, others felt that housing was key to any recovery and it would
be wrong to downplay the possibility that further help for the
beleaguered sector could come from the government.

While no concrete details have emerged on the plan yet, market
sources sense that a new plan would involve refinancing non-agency or
private label residential MBS into government backed paper.

If this is the case, congressional approval might be needed and
that may not be easy to obtain given the current frictions.

“Changes to GSE (government-sponsored-enterprises) governing
statutes would likely be needed because the GSEs are prohibited from
guaranteeing mortgages with LTV (loan-to-value) ratios exceeding 80%,
unless they have mortgage insurance,” Barclays Capital’s mortgage
strategist Nicholas Strand said in a report.

But Strand also said, “There are ways to structure it so that no
congressional approval is needed. For example, the government (through
the GSEs) could announce a blanket one-time waiver of reps and
warranties for agency-backed loans that banks refinanced. Banks would be
only too happy to get out of the putback risk and would aggressively
refi the borrowers they can. This does not need congressional approval,
just a regulatory decision.”

While GSEs give up putback option, “that could be offset by
charging a fee on each refinanced loan (as opposed to a fee on the banks
themselves). This fee would be passed on to the borrower and the form of
a somewhat higher rate. Nowhere in this is congressional approval
needed,” Strand added.

A wide variety of mortgage analysts also mentioned other important
factors affecting this issue:

1) If the new plan utilized the Fannie Mae, Freddie Mac or Ginnie
Mae it would encounter Republican opposition. It is also contrary to the
government’s claim that it wants to make the foot print of the GSEs in
the housing market smaller;

2) If the new program was paid for by a fee charged to the largest
banks, it could be viewed in the press as a bailout of irresponsible
homeowners;

3) If the plan is also targeted to agency MBS, it would cost the
retained portfolios of the GSEs $30 to $35 billion;

4) It could also anger foreign and domestic holders of agency MBS
due to the losses they would take and that might temper further appetite
for this paper;

5) Rather than charge the big banks a new fee to fund this, it is
also possible that funds from the impending settlement between the
states and the biggest originators due to foreclosure improprieties
might be used. That settlement is being eyeballed at $20 billion or more
and it could be used to pay for principal writedowns and other measures;

6) While the plan might seem like a good idea, others stress that
originator capacity has already been crimped and that could mean the
effectiveness of any new plan would be limited;

7) Some write this latest plan off as unfeasible, but others note
that the goal of mass refinancings is consistent with the Federal
Reserve White Paper on the topic, sent to Congress in early January. And
while the Fed is only making suggestions, it is also true that the Fed
clearly believes the poor housing situation is one of the major
impediments to economic recovery.

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

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