With the mortgage market shrinking at an ever-increasing rate and consolidation now a mainstay of the sector, observers are keenly aware of this week's presidential election and what a sea change in government might mean for MBS and the housing market at large.

The general consensus seemes to be that the choice of a president is not nearly as important for the mortgage market as the constituency of the two houses of Congress, and the real determining factor would be whether there would be a unified or divided government next year.

"You could expect some gridlock if we don't have one party controlling all three [the presidency, the House of Representatives and the Senate]," said Art Frank, head MBS researcher at Nomura Securities. "And gridlock is what has led to these surpluses. If Gore wins narrowly and the Republicans hang onto Congress, or if Bush wins narrowly but the Democrats take over one of the houses of Congress...there will be a stalemate that has led to the piling up of surplus and paying down of debt.

"So if the Republicans sweep the House, Senate and presidency, the expectation of the market would be for good-size tax cuts coming. If the Democrats win, there will be worrying about spending increases. Either eats into the surplus or reduces the Treasury buybacks."

However, some analysts believe that a Republican win implies a steeper yield curve, which is surely a good thing for mortgage-backed securities. According to David Montano, a director at Credit Suisse First Boston, a Republican victory means that there will be an increased government debt market and a steeper yield curve, and MBS players are generally perceiving that as an advantage.

"But the impact on the housing market depends on the level of rates," Montano said. "If we enter into an easing cycle or a slight recession, there will surely be a slowdown in the housing market, irrespective of who wins."

Still, most sources didn't seem to think the choice of president would have much of a short-term effect on the market. However, Nomura's Frank did think that if Bush wins and the Republicans hold onto both houses of Congress, there could be a widening in spreads this Wednesday in agency debt.

"Democrats are more supportive of the GSEs keeping their current charter than the Republicans are, so there could be a widening of between two to four basis points on the news," Frank said.

However, Montano disagreed. Spreads would only widen if investors value full faith and credit, but a Bush victory implies more government debt in general and would make spreads tighter, Montano said. "But I doubt there will be much of a reaction, unless people believe that the capital gains tax is going to get cut," he added.

Regardless of who wins this week, analysts are calling for origination rates to decline next year as the housing market cools off. Since home appreciation has been running faster than the economy, it is expected to slow down. Overall, a soft landing for the economy is predicted independent of election results, unless one party controls the entire government.

"From the standpoint of interest rates remaining low, a certain amount of gridlock in Washington is a good thing," Frank said.

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