“If we all worked on the assumption that what is accepted as true is really true, there would be little hope for advance.” – by Orville Wright

 The government has flown past its January 31 deadline for a proposal on the future of Freddie and Fannie, and things may drone on for a while. (For the folks at the agencies, it is probably like knowing your boss and your boss’s boss are talk about you in the office down the hall.) Rep. Scott Garrett, chairman of the House Financial Services Committee’s Subcommittee on Capital Markets, announced that he would hold a hearing Wednesday on Feb. 9 on reforming Fannie Mae and Freddie Mac. “This hearing will be the first in a series of hearings to examine the steps Congress can take right now to protect taxpayers from the ongoing bailout of Fannie Mae and Freddie Mac.” The hearing is titled “GSE Reform: Immediate Steps to Protect Taxpayers and End the Bailout,” and will focus on immediate steps that Congress can take to begin F&F’s transition out of Federal conservatorship and examine ways to end the $150 billion bailout.

Speaking of proposals, it is heavily rumored that the Obama administration will recommend reducing the size of mortgages eligible for government backing. If that happens, it will, of course, make obtaining a home loan in high-priced areas more expensive. The $729,750 figure, of course, is only temporary and only available in certain areas. (In the old days, conventional loan limits were set around Thanksgiving, with secondary marketing managers being hounded by producers leading up to the announcement.) “The administration is now likely to suggest that Congress allow the policy to lapse as scheduled in September, lowering the loan limit to $625,500.” Limits

So investors were watching closely Friday when the prepayment speeds were announced. The aggregate prepayment speeds for Fannie Mae 30-year securities dropped 24%, for example, and speeds dropped much more for recent vintages. For seasoned pools, prepayment speeds came in faster than many had projected. Prepayments are based on many things: age of the loan, maturity, original note rate, potential of using HARP for streamline refinances, etc. Barclays, for example, suggests that over the next few months 30-yr prepayments should continue to slow significantly, and that the “2010 “vintage” will likely prepay significantly slower than its 2009 counterpart, for multiple reasons. One factor that may not have been priced in by the market is that the 2010 vintage has a large concentration of HARP-refinanced loans, which should prepay much slower than average. The biggest risk to prepayments right now is a possible expansion of the HARP program to all GSE loans. That would lead to a sharp rebound in the speeds of 2009 and later production.”

Friday topped off a bad week for rates with a very confusing Employment report followed by confusing price action. The headline drop in the Unemployment rate from 9.5% to 9% generated some large block selling, but a good percentage of analysts believe deep down this report looks pretty weak with only 36k jobs created and the rate plunge largely based on the unemployed giving up on their job searches. The BLS reported that bad weather kept over 700,000 Americans from work during the survey week, which certainly introduced a negative bias into things. The weather does not have as much of an impact on the Household Survey and the big story is the fact that the unemployment rate plunged 40 basis points to 9.4%.

Is the January Jobs Report Stronger Than It Appears? The confusing employment report on Friday reflected a dramatic drop in the unemployment rate without a strong uptick in job creation. Is the unusually large amounts of snowfall to blame for the negligible progress in job growth in January? The household survey reports a 117,000 rise in employment for January, much more than the 36,000 gain in payrolls reported via the establishment survey. The establishment survey has a smaller margin of error compared to the household survey because of its much larger sample size.

Bernanke Bets Commodities Won’t Fan Inflation Concern. Surging food and energy prices won’t accelerate U.S. inflation, allowing Fed to maintain easy money.

Fed Spends 40% on Benchmark Treasuries as Newest Prove Cheapest. The Federal Reserve’s Treasury purchases already have succeeded in driving investors to junk bonds and stocks. Now the are focus is on benchmark government securities, helping contain rising yields that set rates on everything from corporate debt to mortgages.