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CBO casts doubt over Fed refinancing plan

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A federally induced mortgage-refinancing plan would cost private bond investors $13 billion to $15 billion, while doing little to improve the overall mortgage default rate, the Congressional Budget Office said in a new report. The proposed refinancing plan suggests the process of moving borrowers into refinanced mortgages will save homeowners with federally insured loans from defaulting while creating economic stimulus in the form of enhanced household liquidity. The CBO conducted a cost-benefit analysis of the federal refinancing plan that showed it will result in 2.9 million mortgages being refinanced but only 111,000 fewer defaults. In terms of total cost savings for Fannie Mae, Freddie Mac and the Federal Housing Administration, the CBO said the agencies will save about $3.9 billion on their credit guarantee exposure. However, those gains will be offset by losses incurred by investors of agency mortgage-backed securities. Those investors, which include the Treasury, the GSEs themselves and the Federal Reserve, would experience losses of roughly $4.5 billion, according to the CBO. When analyzing those losses against expected gains, the refinancing plan would end up costing the federal government $600 million. The CBO concluded that "because the estimated gains and losses are small relative to the size of the housing market, the mortgage market and the overall economy, the effects on those markets and the economy would be small as well." The legislative branch watchdog said federal agencies will be impacted by a mass refinancing plan in various ways. "FHA achieves savings from reduced losses on its outstanding guarantees," the CBO wrote in a working paper on the potential refinancing plan. "For the GSEs, the savings from lower guarantee losses approximately offset the losses on their portfolios. The Federal Reserve and the Treasury experience losses on their portfolio holdings." The plan also could impact lawsuits filed against mortgage originators by federal housing agencies over issues with representations and warranties included in securitization contracts. "For the originator of the existing loan, a refinancing represents the loss of both a borrower relationship and a servicing obligation," the CBO said. "It also relieves the originator of any obligation it may have had with respect to representations and warranties on the existing loan." The CBO expects the move would effect services in the same way. "The servicer of the existing loan will lose its servicing asset and customer relationship but will also be relieved of any representation and warranty obligations attached to the servicing process," the CBO wrote. Write to: Kerri Panchuk.

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