* Borrowers' gain is investors' pain
* One scenario shows $15 billion in losses
* Impact slight in $5 trillion mortgage market
* Bond market registered initial hit weeks ago
* Battles to come over proposal, loss estimates
By David Henry
NEW YORK, Sept 9 (Reuters) - President Barack Obama's call for changes to a mortgage refinance initiative is already costing bond investors, even before it can prop up the housing market and the economy.
Obama said in address to the U.S. Congress on Thursday he would work with federal housing agencies to allow more people to refinance at lower rates, possibly saving borrowers $2,000 a year or more.
His goal is to remove barriers in the government's Home Affordable Refinance Program at Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). Under HARP, the agencies agree to back new, lower-rate mortgages for qualified borrowers to use to pay back loans worth more than their houses.
But arranging for borrowers to pay less means losses for investors in bonds created out of old higher-rate mortgages. Under one scenario for changing the HARP rules to encourage refinancings, some $13 billion to $15 billion would be transferred from private investors in mortgage-backed securities to borrowers, according to a study this week by three scholars for the Congressional Budget Office. (1.usa.gov/n95PsJ)
There are about $5 trillion of mortgage bonds outstanding, according to industry analysts.
The HARP program applies only to mortgages originated before June 2009 and guaranteed, or owned, by Fannie Mae and Freddie Mac, two housing agencies now under a government conservatorship. Only 838,000 borrowers have refinanced through the program, far fewer than policy makers wanted. Eligibility has been limited by certain criteria, such as barring loans for more than 125 percent of the value of a home.
The loan-to-value criteria may be one of the barriers Obama has in mind to change, but he did not say.
Bond investors have been anticipating for weeks that Obama would move to relax the limits. Market prices fell recently for certain mortgage-backed securities that are likely to be the most affected by easier refinancing under HARP, said Sandipan Deb, a residential credit strategist at Barclays Capital.
But the absence of details in Obama's speech left investors unsure about exactly what the impact could be.
"Nothing has come really other than, 'We will do something,'" said Deb. "Now the market is sort-of in limbo."
Tom Deutsch, executive director of the American Securitization Forum, which represents underwriters and investors in mortgage-backed securities, said the Obama administration has released too few details to speculate on how much it could cost investors.
The form of the plan is likely to start battles between competing interests in Washington, said another industry lobbyist. Estimates of the potential costs are likely to be fiercely debated, too. Valuing uncertain cash flows from pools of mortgages that can be refinanced is extremely complex and sensitive to slight changes in underlying estimates.
The federal government and the Federal Reserve own about 35 percent of mortgage-bonds through Fannie Mae and Freddie Mac and other entities. The study for the CBO said losses to the government from lower interest payments would be largely offset by savings from fewer defaults and foreclosures.
For banks in aggregate, the changes would likely bring an even mix of losses and gains for their businesses originating and servicing mortgage loans.
Daniel Alpert, a specialist in structured finance and founding partner at Westwood Capital, said banks and taxpayers would benefit overall if the changes result in more borrowers staying in their homes.
"The compelling case for doing this is that it can result in fewer foreclosures," Alpert said.
Seized homes tend to be worth only about one third of the value of the loans.
"Recoveries are pathetically low," Alpert added. (Reporting by David Henry; editing by Andre Grenon)