Mortgage-backed securities investors harbor lingering concerns about the possibility of a successful confirmation of Rep. Mel Watt, D-N.C., as director of the Federal Housing Finance Agency.

Such policy woes have investors contemplating an expansion of refinancing opportunities, the broadening of loan modifications and the development of new government-sponsored enterprise and housing finance reform plans, according to Bank of America Merrill Lynch's latest report. 

"While the boundary lines of these risks to investors are not very well defined, we would expect less market disruption and volatility today than we might have expected a year ago, given how the economy, housing market, political focus and interest rates have changed in the past 12 months," analysts for BofAML explained.

This type of new leadership would coincide with aggressive intiatives to reform the mortgage finance market within Congress, limiting the scope of any future reform debate.

A variety of policymakers have put forth reform efforts in Congress, including Senate Banking Committee Chairman Tim Johnson, D-S.D., Sens. Bob Corker, R-TN, and Mark Warner, D-VA, as well as Rep. Jeb Hensarling, R-TX.

Meanwhile, the economic landscape has changed — spending cuts, and drastic actions in the mortgage space are not necessarily needed right away, BofAML noted.

"Against today’s economic backdrop, aggressive policy actions are less likely to be a focus compared to the past," BofAML analysts argued.

They added, "However, risks do exist that the administration and Treasury may wish to push refinancing plans or principal forgiveness plans, especially those that can be executed administratively by the FHFA."

These mitigating factors aside, Watt’s confirmation could draw investor attention to the potential for a Home Affordable Refinance Program date extension. 

On a similar note, analysts for JPMorgan Chase (JPM) believe the potential for a HARP eligibility date change is the greatest concern for investors. 

Given the Federal Housing Administration’s need to shore up its Mutual Mortgage Insurance Fund, foregoing possible fees doesn’t seem to make economic sense, BofAML noted.

Overall, while there is a higher probability of a new FHFA director starting this year, an increase spread in volatility is evident given the weakening in the derivatives sector.

"Elevated concerns could result in the market over estimating the ultimate impact on prepayment speeds," BofAML analysts said.

They concluded, "Impacted Ginnie Mae securities with high exposure to these eligible loans — pass-throughs and mortgage derivatives in the belly of the stack — could be repriced to much faster speeds, between 10-15 CPR faster from current levels. Should clarity develop along the more benign outlook we expect this could present a buying opportunity."