Mortgage-backed securities were just about on spread last week, observers said, though the more important occurrence that players took note of was that MBS significantly outperformed the swap market.

"For once, we have finally seen some decent volume in the mortgage market," said Art Frank, director of mortgage research at Nomura Securities. "We actually saw some buying late in the week."

Mortgages widened one basis point last week, closing at a current coupon Fannie Mae benchmark spread of 155, as compared with 154 the week before. Comparatively, the 10-year swap spread widened three basis points on the week.

"I'd say mortgages definitely had a good week, with some good buying on both Wednesday and Thursday," said an MBS trader.

Two Big Announcements

Following up on its Sept. 8 announcement that it would expand the range of securities it accepts as collateral for repurchase transactions with primary dealers to include agency mortgage-backed securities, the New York Fed announced last week that adjustable-rate mortgages will also be accepted as collateral.

"To tell the truth, we at Nomura assumed from the beginning that that was part of the deal," said Frank. "When they said passthroughs' the first time around, they did not say fixed-rate' passthroughs. It is reassuring news on the one hand, but ARMs did not rally strongly on the news; they were simply in line with their hedge ratios."

In other news, market participants report that Ginnie Mae's managers made it clear and public at an investor symposium in New York last week that it fully intended to move forward with its plan to launch a $60 billion portfolio through which the agency would buy its own MBS. The proposal - called the Community and Housing Investment Fund, or CHIF - is in the budget formulation process. It must be approved by the Office of Management and Budget (OMB), the Treasury and then by Congress.

In addition, sources mentioned that at the symposium, somebody from Chase Manhattan Mortgage Corp. expressed a need to somehow change Ginnie Mae's I and II programs, since the current proposed plan has hurt them badly

The Chase market play said that the company would like to see Ginnie II's trade closer to economic value; barring that they'd like to get rid of Ginnie II's altogether and make everything a Ginnie I.

In response, Ginnie spokesman Rob Fry, while not making any concrete proposals, said that a possible solution might be to make everything a Ginnie II, and have a conversion feature. Alternatively, Fry suggested having both types of Ginnie Mae securities pay on the same date.

"Basically, Ginnie officials officials expressed interest in erasing the line somehow between Ginnie I's and Ginnie II's," said one market player who attended the symposium. "While I don't foresee this happening in the near future, obviously, the wheels are turning."

If the Ginnie Mae II program had the same delay days as Ginnie Mae I's, it would allow greater flexibility in servicing fees for Ginnie Mae I's, sources say.

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