The value of Fannie Mae and Freddie Mac debt securities saw major improvement last week following the accord between Representative Richard Baker (R.-La.) and the GSEs (see story above), which caused them to richen significantly relative to everything else in the mortgage realm, including passthroughs, CMBS and home-equities.

"As a result of that we think that attentive customers are receptive to owning mortgages, hoping they would get a little push and accrete some excess return in the fourth quarter since we gave up so much in the second quarter," said an MBS investor. "So it's a bit of a payback."

"We're lagging agencies, but we'll accelerate and overtake them," said a trader. "All bonds out there will be significantly better valued at the end of the year relative to where they are now."

At closing last Thursday, mortgages ended the day mixed with 30s underperforming by 1.6 ticks and 15s slightly outperforming at +0.8 ticks. With yields rising and higher coupons recently lagging, investors have preferred doing the up-in coupon trade, sources said.

In addition, last week there were some swaps into discount 15s, as well as out of the sector into agencies on the spread-tightening potential there. Discount 30s were off by three ticks on the investor and originator selling versus flat to slightly outperforming by premiums. Fifteen-year discounts were up two ticks versus flat for 6.5s and above.

The sector continues to see good participation by all account types, sources said, particularly over the past week.

Spreads recovered about a basis point by mid-day last Thursday, closing one to two basis points wider in discounts and unchanged to slightly tighter in 8s and higher. Fifteens were mostly unchanged.

Mortgages trailed all other spread sectors as of press time last Thursday.

Over the last two weeks, agency supply has totaled $20 billion, the most since January, sources say. Benchmark and Reference note offerings have equaled about $16 billion and this week Fannie Mae is coming with between $7 billion and $8 billion. The deal is reportedly in good shape.

Regulatory Update

Congress is still in session trying to clear things out before the extended October 31 deadline.

Partially finished are some issues associated with GSE reform following last week's joint announcement by the GSEs to increase capital and financial transparency, which was a major goal of Rep. Baker's.

His next goal, which he hopes to accomplish next session, is to improve regulation of the GSEs. He has support from the Treasury which announced shortly after the GSEs' disclosures that there remain a range of issues that warrant continued attention from financial authorities, Congress and the regulators.

How successful and/or how fast Rep. Baker is able to develop his second goal depends on whether he gets the chairmanship of the House Banking Committee. Odds are not favorable, sources say. Rep. Marge Roukema is next in line for that chairmanship and it appears unlikely the GOP would pass over a woman in a leadership role as few have the seniority for such a position.

CMBS: Seasoned Pools to Surface

A CMBS source said that one of the insurance companies will bring a pool of seasoned loans to market very shortly.

There have been a few seasoned-loan pools lately and more single-asset transactions because the corporate market is so wide lately.

"These REITs that go to market in the unsecured bond market, they are paying a lot more than they do in the CMBS market," the source said. "In some cases, they pay 100 basis points more."

Other observers believe that single-asset deals will be driving a lot of the activity going forward, and the "big single-asset trophy" deals are what is traded.

"For any major real estate market, investors who held these large single-assets held them for the last two to three years and are selling assets prudently, and that means those assets will have to be financed, so we should expect to see more and more activity," the source added.

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