Mortgage plans boon or bust for government: Citi

NEW YORK (Reuters) - Congressional proposals aimed at refinancing distressed mortgages could be a boon or bust for the U.S. government depending on the recidivism of delinquent homeowners and the rates they pay on their loans, according to Citigroup Global Markets research released on Friday.

The analysts -- weighing the benefits of insurance premiums and interest cost paid against re-default rates and estimated losses on foreclosed homes -- calculated the government could earn as much as $31 billion or lose up to $20 billion.

The analysis studies a sweeping mortgage reform bill that would fund $300 billion in troubled mortgages by expanding the Federal Housing Administration's loan guarantee program. The plan, which would lower the principal owed through voluntary mortgage company write-downs, could save 2 million homeowners from foreclosure, according to House Financial Services Committee Chairman Barney Frank.

Frank, a Massachusetts Democrat, estimated the program could cost the government up to $6 billion. The bill passed in his committee by a 46-21 vote on Thursday.

Citigroup analysts, led by Rahul Parulekar, estimated that 1 million to 1.5 million borrowers could refinance to a FHA loan under the Frank proposal and a similar program offered by Christopher Dodd, chairman of the Senate Banking Committee.

Both bills seek to reduce foreclosures by giving homeowners a renewed stake in their properties. Falling home prices will result in more than half of all subprime borrowers owing more than their homes are worth by year end, exacerbating foreclosures that are adding to bloated inventory and pressuring prices lower, according to Credit Suisse.

The bills address "the real problem," which "appears to be homeowners walking away from 'upside down' mortgages," the analysts wrote in the research note. "The odds are that some version of these proposals will likely be passed over the next few months" and have an impact by year end, they said.

Frank's bill has won support of some Republicans given the depth of the housing crisis. But others say that helping those who made poor investments with taxpayer dollars would create moral hazard -- the concept that investors will take greater risks believing that the government will protect them from losses.

(Reporting by Al Yoon; Editing by Leslie Adler)