The passage of the payroll tax holiday extension in December was, in my mind, a watershed moment for the mortgage and MBS markets. For the first time, Congress instituted a tax on mortgage transactions, to be collected by Fannie Mae and Freddie Mac. In this light, the operative question for regulators and policy makers is simple: "What are we trying to accomplish?"

In addition to the continued discussions involving non-agency risk retention, a number of proposals and ideas that would threaten the stability of the agency TBA market are under consideration. Most prominent of these is the proposal to change servicing compensation to a strict "fee-for-service" scheme. While the proposal does have some merit, it would be highly disruptive to both mortgage lending and TBA trading, the one sector of the MBS market that has functioned reasonably well throughout the last four years. Along with forcing lenders to substantially change their best-execution calculations, the fundamentals of loan "pooling" would be altered. It is unclear how a fixed-dollar cost of servicing would be included in the creation of a pool, and it would also make comparisons across different cohorts and vintages extremely difficult.

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