* 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 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.
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)