Federal Reserve purchases of agency mortgage-backed securities (MBS) continued last week to support the agency MBS market while prepayment speeds for both agency and private-label MBS slowed in September. The Fed's net purchases of MBS from mortgage giants Freddie Mac (FRE), Fannie Mae (FNM) and Ginnie Mae remained at $20bn in the week ending October 7, unchanged from a week earlier but lower than recent weekly transactions. The Fed is on track to buy $1.25trn in agency MBS, and intends to wind down the purchasing program before its anticipated conclusion at the end of Q110. A key challenge facing the Fed into 2010 is the task of scaling back its purchases of agency MBS in a way that transitions the market back to a state of being supported through private demand, according to a securitized products research note from Barclays Capital (BarCap). "While it has recently taken steps to ensure an orderly transition by extending its purchase program through Q110, its success will ultimately depend on the willingness of the private sector to step up and be the marginal buyer of MBS," BarCap researchers wrote in the report Friday. Meanwhile, the private MBS market remains subdued with little investor interest, declining prepayment speeds and a rising balance of non-performing loans to nearly $600bn -- while more than $1trn remains performing -- according to an Amherst Securities Group mortgage market monitor report through September. Prepay speeds fell across the board last month as fewer loans refinanced, a process through which loans in a securitization enter prepayment status although the loans do not disappear and may likely appear in another securitization. A UBS investment research note pointed out several reasons for the slowdown in prepay rates among agency loans. Interest rates did little to entice borrowers last month, UBS said, indicating rates may not have fallen enough. UBS researchers also pointed to rising unemployment as a deterrent to refinancing, along with potential holdups at the lenders. "[W]e believe banks remain understaffed and are preoccupied with initiating trial [Home Affordable Modification Program] modifications, so their capacity (in addition to their willingness) to lend is also low," UBS researchers wrote. Under HAMP, the Treasury Department allocates capped incentives to servicers for the modification of distressed loans. Those caps are adjusted based on the servicer’s performance. Treasury reported last week the program reached a new milestone of 500,000 loan modifications in progress. Write to Diana Golobay.