With month-end and quarter-end prevailing over the market last week, not even a Federal Reserve interest rate announcement could create a stir among mortgages.

"We closed last week with the Fannie Mae current coupon at 188 over the 10-year and actually it's still there," said Art Frank, head of mortgage-backed securities research at Nomura Securities. "We really haven't had very much tightening. The mortgage bankers have been fairly quiet. Today [Thursday] there was hardly any selling at all."

Frank also noted that focus had shifted away from the mortgage market last week, with a well-received corporate bond offering from Deutsche Telekom. "Mortgages didn't do quite as well on the week as Deutsche Telekom, but overall it was a positive tone," he said.

Most traders saw value in higher coupons and proceeded with up-in-coupon trades, mainly to 8s. Compared to 6.5s and 7s, 8s were on the cheap side, but by the end of the week, they had become fairly priced.

"We had seen a fair amount of selling earlier in mid-June and as June wound down, that has slowed down a little bit," added Frank. "But I would say volume wise, it was a fairly quiet week in terms of investor activity, with the dominant trade being up in coupon."

Along with the up-in-coupon trading, Ginnie Mae MBS cheapened a little bit, with discounts performing a little on the expensive side. Ginnie Mae 8s closed 21 ticks over Fannie Mae 8s last week, with Ginnie Mae 7.5s closing over 23 basis points over Fannie Mae 7.5s.

"With our valuation model if anything, Ginnie 7.5s swap should be below the 8 swap, but it's been the other way around for some time," Frank said. "So in the discounts, we think Ginnies are a little on the expensive side, but in current coupon they are pretty fairly priced."

GSEs Mixed on Recourse Rule

Two weeks after the closing of a comment period on a proposed rule that would give all double-A and higher rated private-label securities a 20% risk-weight - the same as the government sponsored enterprises - Fannie Mae and Freddie Mac spoke out about the issue.

As the comment period came to a close June 7, Fannie Mae had no comment, because the company did not feel the new rule would affect it. However, it filed a letter shortly before the deadline, stating the rule would have the opposite of the intended effect.

"We strongly believe that by applying traditional ratio-based capital standards to the face value' of mezzanine risk positions will not have the intended result of lowering capital requirements on safer positions and raising requirements on risky positions," states Fannie Mae in its letter. "To the contrary, the proposed regulation may have the opposite effect."

Fannie Mae suggested that two ratings should be required for the securities and the lower rating be used to determine its risk-weight.

On the contrary, Freddie Mac stated, "Freddie Mac strongly supports the expressed objective of the proposed rule to better align regulatory capital with the risk of a transaction or instrument. Accordingly, we endorse the proposal to make consistent the regulatory capital treatment of recourse and direct credit substitutes."

However, the company does caution that the rule, as stated, could significantly reduce capital levels without a reduction in credit risk exposure. "This clearly would not achieve the Agencies' goal of aligning capital with risk."

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