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Watt FHFA confirmation is right around the corner

Agency MBS investors prepare for the shift

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The reality of a Mel Watt-led Federal Housing Finance Agency is sinking in, with Washington policy analysts expecting a final vote and confirmation for Watt to lead the agency as early as next week.  

"The vote could occur as early as December 10, and is unlikely to fall past December 13," Compass Point pointed out. "Rep. Watt will take the helm at the FHFA almost immediately after being confirmed by the Senate. There remains uncertainty regarding the release timeline of the FHFA’s conservatorship scorecard which was originally expected to be released by the end of 2013."

Watt’s appointment next week is considered a foregone conclusion, policy analysts say, given the fact that Sen. Harry Reid, D-Nev., enacted a procedural change that lowered the confirmation-voting threshold to 51 from 60.

The realization of a Watt-era in FHFA leadership already has investors in agency residential mortgage-backed securities preparing for a major shift.

In a Watt environment — where principal reductions and a HARP refi expansion would become more of a possibility — agency prepayments turn into a wildcard for MBS investors, analysts with Royal Bank of Scotland said. 

Sarah Hu with RBS notes that, "while some of these risks may have already been priced into the market, investors will likely face additional prepayment uncertainty."

Expanding the eligibility for HARP is most likely to impact the 4.5s coupons and 5s, Hu said, increasing those prepayments by 3 CPR (conditional repayment rate) and 9 CPR, respectively, if the eligibility cut-off date is expanded by just one year.

"Finally, as large banks continue to scale back their mortgage business and less efficient smaller shops begin to originate more loans, we may see a further dampening of already muted refinance volumes," Hu wrote.

RBS expects December prepayments to decline by 10% on higher mortgage rates and weaker seasonality. Hu notes it’s “a factor that should continue driving the speeds of deep discount 3s and 3.5s lower."

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