The Federal Housing Finance Board's approval of a proposal last week to phase out the arbitrage investments of the Federal Home Loan Bank (FHLB) system and divest the banks of their mortgage-backed securities assets over a five-year period turned many heads in the MBS community.

Though the decision, which will have a 90-day public comment period, was not completely unexpected, market players generally viewed it as a significant event, possibly impacting both spread product and buyside activity down the road due to the FHLB's status as one of the largest buyers of MBS, sources say.

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