Private investors would lose $13 billion to $15 billion in a massive federal plan to refinance millions of mortgages with new government-backed mortgages with super low interest rates, says the Congressional Budget Office.
Investors would lose twice as much as borrowers would get in mortgage payment relief, the CBO says in a working paper.
The plan to ease income and loan-to-value standards would prompt about 2.9 million homeowners to refinance and decrease mortgage defaults by 111,000, the CBO estimates.
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However, the federal government would face a fair-value loss of about $600 million in the mortgages it guarantees.
"Like their federal counterparts, non-federal investors will see the fair value of their investments fall as a result of this program," states the CBO report.
In addition to private investors like banks, pension funds, life insurance companies, and mutual funds, nonfederal investors include state and local governments. Those nonfederal investors hold about 65 percent of older, higher-rate mortgage-backed securities and will suffer a disproportionally larger loss.
Plus, the CBO said the plan would have only a small impact on the overall housing market.
The initiative would allow homeowners with mortgages backed by Fannie Mae, Freddie Mac and the FHA to refinance into low-rate 30-year mortgages, helping them to avoid foreclosure.
The CBO study calls into question the administration's effort to turnaround the moribund housing market, according to the Financial Times. Administration officials have criticized the Federal Housing Finance Agency, Fannie's and Freddie's regulator, for blocking their earlier mortgage proposals, but the CBO now vindicates the FHFA, the Financial Times says.
Yet others support the idea, noting it will pump money into the economy by lowering homeowners'' monthly mortgage costs.
"This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing," Christopher J. Mayer, an economist at the Columbia Business School, told The New York Times. "So I think this is low-hanging fruit."
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