Rates once again proved federal officials' go-to choice for economic policy action last week but when it comes to sizing up potential economic recovery as part of mortgage investment strategies one might do better these days watching jobs over the traditional duo of rates and real estate markets.

Not to say all three aren't still important or federal officials were wrong in targeting rates, but as Mahesh Swaminathan, head of RMBS strategy/fixed-income research at Credit Suisse, told listeners to the firm's monthly strategy call last week housing is now "the cart, not the horse" anymore.

The Obama administration plan made last week for an additional $3 billion in funding for programs aimed at helping unemployed homeowners with their mortgage payments as they seek re-employment may be a response to this.

Unemployment may not peak until 2011, Dimitri N. Delis, director at BMO Capital Markets, told listeners to a recent conference call.

In the mean time, while federal officials may be taking some action to address employment concerns, Credit Suisse's Neal Soss said government in general seems to be moving in the other direction when it comes to job creation.

Private sector job prospects look better than the relatively deep cuts in the public sector, he said, noting that the catalyst for this is largely state and local governments' fiscal struggles. Soss's theory is this will eventually result in the federal government stepping in and becoming more influential on this front.

Interesting in the context of the mortgage market is that Soss also sees this as having a bearing on housing, as the falling quality of state and local services combined with property tax increases affect home values.

As Chief U.S. Financial Economist Brian Bethune at IHS Global Insight pointed out, there is a "push me/pull you" situation in the market today.

He was responding to a question from this publication about the effect of low rates countered by tight underwriting, but it can be more broadly applied to several other current market dilemmas.

Speaking of rates, while they have some advantages in terms of keeping funding costs low, they continue to be a double-edged sword for the mortgage market. Among other things, they mean relatively low yields/returns on new product for mortgage investors.

Not that, as Soss pointed out in the recent Credit Suisse call, there has been much sympathy for that in the court of public opinion.

Also as Bethune pointed out when asked about this, although low yields are a challenge for investors in new mortgage investments, it helps outstanding ones in portfolio that have not run off as it in increases their price.

This means investors still have run-off/prepayment risk to worry about.

As far as prepayment risks for agency product go there have been, as Credit Suisse noted, some surprises on the upside in the cusp coupons.

But high coupon speeds have been "tame." What prepayment risk there is continues to be largely credit driven versus rate driven, given consumers' financial constraints/job challenges, lenders¹ tight underwriting and continued home price concerns in many areas.

But as previously mentioned record low rates do have a role to play that can be positive depending on where one is positioned in the market, even if it is symbolic or moderate in its effect given recent market conditions.

There also are other areas of optimism to emerge such as increased interest and progress when it comes to commercial mortgage securitization¹s comeback.

Still, recent indicators on a net basis paint a picture of recovery further out than previously expected, but still within sight. As Delis said last week, a double dip in housing may be unavoidable. But there remains a belief a swing upward will come so long as improved job prospects do.

Until then, due to continuing employment weakness as seen in the recent jobs report there may persist a market in which there are two classes of people, those in the "functioning economy" and those that believe it no longer has a place for them, Soss said.

Federal officials' efforts to address this in the context of the mortgage market can have some bearing on prepayment rates in some situations but not in others.

The new Emergency Homeowners Loan Program that the Department of Housing and Urban Development will run with $1 billion of the aforementioned $3 billion in funding appeared last week at least initially to have "little or no" implications as far as agency prepayments, according to a Barclays Capital report.

"There is a small possibility that some loans may not be bought out as a result of this program; however, given the small size of the program, we do not expect this to be a concern," the Barclays researchers said.

But in contrast, a separate report last week by Barclays analysts suggested another federal program has had a bearing on some 2009 vintage agency prepayments.

The Home Affordable Refinance Program (HARP) is seen in the report as "mainly" responsible for Fannie Mae pools originated after March 2009 showing much slower prepayments and FHLMC Golds 5s seeing a sharp drop in speeds when it came to pools originated in May or later.

The HARP program had a March 1, 2009 cut-off time for Fannie Mae and a May 3, 2009 cut-off for Freddie Mac.

Others have said the difference in speeds could be seasoning related, but the Barclays researchers said they disagree.

Another potential influence on prepayments could be the Federal Housing Administration Short Refinance Program.

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