JPMorgan (JPM) is recommending to bond investors to remain overweight in mortgage-backed securities vs. swaps despite the narrowing of roughly 20 basis points in spreads since the summer. Analysts said spreads may narrow another five to 10 basis points upon softer volatility and higher rates may lead banks to increase positions in MBS. The indication is that the investment bank may be shifting to a neutral position on MBS. JPMorgan expects a slew of proposals on the future of Freddie Mac, Fannie Mae, and the Federal Home Loan Banks to be bounced around on Capitol Hill, as the future of the GSEs takes form. Analysts called the appointment of Joseph Smith to head of the Federal Housing Finance Agency a "small step in a long road towards restructuring housing finance." The Obama administration is set announce its set of proposals on the revamping of the GSEs in January. "Ultimately, however, we believe it could take years for the final shape of U.S. housing finance to emerge," JPMorgan analysts said. Meanwhile, the analysts also expect non-agency prices to stay relatively flat in the coming weeks. Although because most investors reaped double-digit returns this year and yields are at two-year lows, "many investors will require compelling value opportunities to add further into year-end." "We continue to see opportunity in lower dollar priced Alt-A fixed-rate paper where unlevered, loss-adjusted yields are in the 7+% context," the analysts said. "Higher dollar priced fixed-rate paper is likely to lead the way into any rally as leverage is more readily available and there is greater investor participation." Write to Jason Philyaw.