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Industry Insiders: Rough Road Ahead for Obama Refi Proposal

Mortgage markets and industries moved to the sound of ""President Barack Obama"":http://www.whitehouse.gov/administration/president-obama/ speaking Thursday, as the commander-in-chief rolled out an ambitious $447 billion jobs bill and touted a major refinance proposal. With the Congressional Budget Office (CBO) ""estimating"":https://themreport.com/articles/cbo-fields-winners-losers-in-obama-refinance-bill-2011-09-08 that some 2.9 million homeowners could refinance their mortgages at current rates, industry veterans and analysts offered up alternatives and forecasts for the future of a refi boom.

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The president's proposal follows the CBO report, which sketched a portrait of the benefits and consequences implicit to a massive number of refinanced mortgages.

The CBO laid waste to claims by policymakers and academes that a refinancing surge would lift home prices, saying it would ""not address many of the problems"" facing the housing economy.

Mortgage borrowers and the GSEs would likely see a boon, it said, with lenders, servicers, mortgage insurers, and investors in mortgage-backed securities suffering losses.

Chad Wandler, a spokesperson with ""Freddie Mac"":http://www.freddiemac.com/, declined to comment on the nature of any benefits to Freddie, explaining that the GSE would need to wait for a detailed bill that Obama delivers to Congress in 10 days.

Speaking with _MReport_, ""Mark Calabria"":http://www.cato.org/people/mark-calabria, a director of regulation studies with the ""Cato Institute"":http://www.cato.org/, calls the homeowner-gain, investor-loss strategy a ""transfer of wealth"" from the latter to the former.

""This isn't something that was going to help the housing market,"" he says. Policymakers pushing the proposal ""think people will spend more, but investors will spend less.""

""Alex Pollock"":http://www.aei.org/scholar/88, a resident fellow with the ""American Enterprise Institute"":http://www.aei.org/home and former president of the ""Federal Home Loan Bank of Chicago"":http://www.fhlbc.com/index.shtml, calls the proposal a ""reasonable idea"" but points to low home prices in a bad market as reasons why a refinancing surge may not work.

He says a ""severe price deflation"" will prevent homeowners from refinancing their loans at current rates to their advantage. His remarks follow a ""Clear Capital"":http://clearcapital.com/ index that ""forecasted"":https://themreport.com/articles/clear-capital-gloomy-skies-ahead-for-home-prices-2011-09-08 a winter dip for home prices, which rose to a sunny 4.0 percent over summer.

""The old assumption is this would trigger a massive refinancing wave and people would lower their debt service payment by quite a bit,"" Pollock adds.

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""No one five years ago thought a deflation in house prices"" would couple with ""loan amounts [becoming] greater than the current amount"" for mortgage borrowers, he says.

Price deflations and CBO numbers may not serve up the only stumbling block for a refinance expansion under the Obama administration.

According to analysts, the White House will first need to secure approval from the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA), whose acting director, ""Edward DeMarco"":http://www.fhfa.gov/Default.aspx?Page=67, insiders widely speculate will turn down the initiative if it fails to move ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and Freddie Mac out of troubled waters.

""DeMarco's hands are tied in his condition to nurse these companies back to health,"" says Calabria, who has collaborated with the FHFA chief in his past role as a ""Senate Banking Committee"":http://banking.senate.gov/public/ staffer. ""He has a high bar in his mind: Does this proposal help Fannie and Freddie get back to sounder footing? Not at all does he look at his job as a way to make sure that Fannie and Freddie hand out goodies.""

Despite ""a tremendous amount of pressure"" on the acting director, he says there is ""pushback from DeMarco"" and Republican lawmakers.

DeMarco ""is not beyond being convinced,"" Calabria says. ""I think he's drifted from being open to things that make sense to being far more skeptical. We have had three years of one gimmick after another that hasn't worked, and I think in his mind he's raised the bar"" for which initiatives he will approve for the GSEs.

Stefanie Johnson, a spokesperson for the FHFA, could not be immediately reached for comment.

Analysts speaking with _MReport_ say that the ""Home Affordable Refinance Program"":http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx (HARP) presents itself as a useful alternative if DeMarco or other federal agencies strike down the refinance proposal.

""Low mortgage rates are great, but to get the biggest economic impact out of these low mortgage rates, they have to be applicable to more people,"" says ""Greg McBride"":http://www.bankrate.com/blogs/federal-reserve/about-greg-mcbride-cfa.aspx, a senior financial analyst with finance Web site ""Bankrate.com"":http://www.bankrate.com/. ""The way to go about that is to increase the existing loan-to-value maximum for the HARP program from 125 percent to something significantly higher.""

According to McBride, more homeowners would be able to refinance their loans with less fallout for the likes of investors, lenders, and servicers if the Obama administration raised the loan-to-value cap from 125 percent to 160 or even 175 percent.

He says such a move would offer an incentive to ""people who are seriously underwater on their mortgages but have made their payments on time.""

Calabria feels unsure about even an adjustment to the HARP loan-to-value ratio. He says that most mortgage borrowers are unable to refinance even at current rates, and that ""lenders first have to agree to it.""

He says that he expects ""tweaks to HARP"" in place of a failure by the Obama refinance program to secure a pass from federal agencies and lawmakers.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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