CBO Fields Winners, Losers in Obama Refinance Program

Speaking before a joint session of Congress Thursday evening, ""President Barack Obama"":http://www.whitehouse.gov/administration/president-obama unveiled a $447 billion jobs bill - and plans to allow millions of eligible homeowners to refinance their mortgages at current rates, a staggering measure that White House officials hope will lift home prices from squalor and pad the empty pockets of American families. A ""Congressional Budget Office"":http://cbo.gov/ftpdocs/124xx/doc12405/09-07-2011-Large-Scale_Refinancing_Program.pdf (CBO) report walked a strictly nonpartisan line by dispelling the hype and criticism with both good and bad news.

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The refinance initiative snagged a few lines toward the end of his prime time address, following an outline heavy with references to infrastructure programs, tax incentives for small businesses, reform aimed at the tax code, and more.

But even those few lines shook the industry.

Pledging help for ""responsible homeowners,"" Obama confirmed a slew of reports by saying that the White House will ""work with federal housing agencies to help more people refinance their mortgages"" at current interest rates.

The president added that the refinance proposal would prop up American families to the tune of $2,000 a year, giving ""a lift to an economy still burdened by the drop in housing prices"" in the process.

Despite high-flying rhetoric from either side of the aisle, the CBO released a report clarifying the gains to be had from a major refinance program under the Obama administration. A model used by the federal agency revealed that borrowers could reduce their mortgage payments by approximately $7.4 billion, netting about $2,600 in savings per homeowner.

The report also offered up clear winners and probable losers in unmistakable terms.

The winners? Mortgage borrowers suddenly able to refinance their loans at current rates and government entities like the GSEs and ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory, which back over $11 trillion in federally insured loans, according to the CBO.

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That means struggling homeowners could reap a bevy of benefits from mortgage rates, which ""Bankrate.com"":http://www.bankrate.com/ and ""Freddie Mac"":http://www.freddiemac.com/ ""found"":https://themreport.com/articles/plummeting-mortgage-rates-set-new-records-2011-09-08 setting record lows Thursday at 4.35 percent and 4.12 percent, respectively, for benchmark 30-year fixed-rate mortgages.

The rates continue a slump unlikely to stop, as investors fleeing euro zone markets buy up more Treasury debt, spreading yields, against which the industry benchmarks rates, in the process.

The losers? Investors in mortgage-backed securities, lenders, servicers, and mortgage insurers could all see their losses eclipse any benefits.

A swath of investors with stakes in federally insured mortgage-backed securities ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô financial institutions, overseas investors, state and local governments, among others ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô could see their pockets empty if the bill passes. The CBO fixed losses for non-federal investors at anywhere between $13 billion and $15 billion as more homeowners refinance their government-backed mortgages.

Unable to slice and dice the specifics without a look at the legislation, the CBO simply added a rough forecast for lenders, servicers, and other institutions that would lose their existing obligations and warranties with mortgage borrowers that opt to refinance.

Market conditions could also derail any attempts by homeowners to refinance their mortgages en masse, the CBO said. REO-laden financial institutions still struggling with low loan volume could lack the wherewithal to meet overwhelming demand.

The federal agency further highlighted the role played by servicers and lien holders, which may not make the same concessions as the FHA or GSEs.

All these potential stumbling blocks aside, a refinance initiative under the Obama administration would need to jump another hurdle: the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA).

Writing for the ""_Washington Post_"":http://www.washingtonpost.com/blogs/ezra-klein/post/can-the-obama-administration-refinance-your-mortgage/2011/08/25/gIQAQs3BeJ_blog.html, columnist Ezra Klein underscored the part played by FHFA acting director Edward DeMarco, a Bush administration holdover who would likely oppose the initiative, along with Republican lawmakers from both chambers, he said.

The refinance initiative confirms reports by multiple news outlets that the Obama administration planned to float the idea. It was unclear Thursday how much the White House pulled from a ""widely reported proposal"":https://themreport.com/articles/print-view/nyt-obama-administration-floating-refi-proposal-2011-08-25 by two ""Columbia Business School"":http://www4.gsb.columbia.edu/ professors, who had originally urged officials to adopt a massive expansion in refinancing activity as a way to encourage the economic recovery.

In his speech, the president said he planned to deliver the highly anticipated bill to Congress in 10 days.