Bruce Morrison, chairman of the Federal Housing Finance Board, resigned last week, leaving the future of the operation of the Federal Home Loan Bank System wide open for speculation.

Morrison, who has been chairing the FHFB since 1995, will step down in July to become vice chairman of consulting and lobbying firm GPC/O'Neill & Associates.

The FHFB regulates the FHLBank System, which is currently going through a restructuring in defining mission related assets, of which Morrison played a large role in removing mortgage-backed securities from that list.

"Certainly Morrison was the driving force behind pushing the FHLBs away from buying mortgage securities and into buying whole loans," said Art Frank, head of MBS research at Nomura Securities. "And it's been their purchases of huge quantities of FHA whole loans that have driven Ginnie Mae supply down."

It is speculated that William Apgar, assistant secretary for the U.S. Department of Housing and Urban Development, will replace Morrison for the interim, which Frank describes as "pro-Ginnie."

Baker Comments Bring Spreads In

Testifying at a Capital Markets Committee meeting last week, U.S. Rep. Richard Baker (R., La.) reported he has no interest in including proposals in his government-sponsored enterprise reform bill that would limit the amount of agency debt commercial banks could hold. During testimony in March, Undersecretary of the Treasury Gary Gensler said that he would support any plans to limit the amount to 10%.

The market reacted to Baker's comments as good news, as spreads tightened within minutes of the statements.

The next hearing on Baker's bill is scheduled for June 15, with members of "taxpayer watchdogs" and consumer groups expected to testify. Baker has thought about letting members of the Federal Reserve testify on the matter; he may decide against it due to unusual market activity that may occur.

Spreads Widen All Around

Despite Baker's comments, spreads for the week gave up all their gains since last Thursday, when they were at 190 over the 10-year Treasury. They had been in as much as 180 over by late Tuesday.

"I think what's weighing on the market is a lot corporate and commercial mortgage supply, some of it actual and some of it coming," Frank said. "With a bit of a rally in the Treasury market in the past couple weeks, and the tightening in spreads that we saw earlier, some people saw it as a good time to issue."

He added that the swaps market is being used as a hedge vehicle for people in corporates and CMBS, which has been driving all spread product wider.

Fannie Mae Prepayments

For the month of Mae, Fannie Mae prepayments were higher, with a unusually large month to month increase, according to Warren Xia, prepayment specialist at Banc of America Securities.

Discount Fannie Mae 6 and 6.5 coupons both increased by 24% to a 6.8% and 8.2% constant prepayment rate, respectively.

Premiums also increased, though by not as much. The aggregate speed for 8.5s, 9s and 9.5s increased by 4%, 9% and 15% to 17.7% CPR, 16.8% CPR and 16.6 CPR, respectively.

Xia expects speeds to decline slightly due to the calendar day effect. "However, the recent drop in mortgage rates are likely to boost the discount speeds in late summer and early fall if rates stay at their current level," he said.

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