The government's new plan to let more underwater homeowners refinance their mortgage is a good deal for homeowners who qualify, but for every dollar they save in monthly payments, someone will lose.

That someone is whoever owns the mortgage being refinanced. Mortgage owners include Fannie Mae and Freddie Mac, the taxpayer-owned entities that own and guarantee home loans; the Federal Reserve, banks, insurance companies, pension funds, endowments and other investors worldwide.

From a cash-flow standpoint, "it's a zero sum game," says banking analyst Bert Ely.

Suppose a bank holds a mortgage paying 6 percent interest. If mortgage rates drop to 4 percent and the homeowner refinances, the bank will get back the outstanding balance, but will have to reinvest that money, almost certainly at a lower rate.

From the investor's standpoint, it's kind of like buying a five-year certificate of deposit yielding 5 percent. If three years later interest rates have dropped to 1 percent, you will be awfully glad you have that CD at 5 percent. If the bank could force you to redeem the CD early, you'd be hopping mad because you would have to reinvest at 1 percent.

Unlike CDs, most mortgages can be prepayed at any time. This is a big risk for mortgage investors.

As interest rates have come down, homeowners with solid income, good credit scores and equity in their homes have been able to refinance at lower rates.

But homeowners who have little equity or are underwater - meaning they owe more than the home is worth - have been largely unable to refinance, even with good income and credit.

To help these borrowers, the Obama administration developed the Home Affordable Refinance Program, or HARP. It lets borrowers with loans owned or guaranteed by Fannie or Freddie refinance into a new loan if their existing mortgage balance is between 80 and 125 percent of the home's value. The homeowners must be current on their mortgage payments and meet other requirements.

The administration predicted that 5 million homeowners would refinance under HARP, but the number to date is about 900,000.

Many homeowners could not qualify because they owe more than 125 percent of their home's value.

Many banks were not willing to make the new loans because if they made any mistakes in the underwriting process and the borrower defaulted, Fannie or Freddie could force the banks to repurchase the loans - and no bank wanted to risk taking back a loan that was underwater from the get-go.

Fannie and Freddie also impose risk-based fees on borrowers with high loan-to-value ratios that in some cases made refinancing uneconomical.

New features

On Monday, the administration announced a new version of HARP designed to overcome these obstacles. It removes the 125 percent limit, promises banks they will not have to take back defaulted loans in most cases and lowers or eliminates the risk-based fees charged to borrowers.

The new program, like the old one, does not reduce the borrower's principal balance and the existing loan still must be owned by Fannie or Freddie. The existing loan must have been made on the homeowner's primary residence, although homeowners can still qualify if they moved out of the home or rented it out.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, predicts that 1 million or more borrowers could benefit from the expanded program. Whether they do depends on the details, which will not be announced until Nov. 15.

Of utmost concern is how much protection lenders will get against potential putbacks. Meg Burns, a spokeswoman for FHFA, says the protection will be very broad. The lender will no longer be "responsible or accountable for the original loan." And they will be on the hook for the new loan only if they didn't verify the "simple, streamlined eligibility standards" that borrowers must meet.

In most cases, the lender making the new loan will not have to verify the borrower's income or credit score; they will only have to make sure the borrower is employed.

If the monthly payment on the new loan is more than 20 percent higher than the payment on the old loan, the new lender will have to do a little more checking on the borrower's income and assets, but not as much as would be required on a traditional loan. (Even if a refi results in a lower rate, the payment could go up if the borrower switches from a 30- year to a 15-year loan or from an adjustable rate to a fixed-rate loan.)

The Obama administration hopes that homeowners who reduce their mortgage payments will spend some of that newfound money, stimulating the economy and employment.

Reduced cash flow

But holders of mortgages that have been refinanced will have less cash flow if they have to reinvest at lower rates.

For private-sector mortgage holders, there's not much upside in this. They will get back the money they were owed, but since these mortgages were already guaranteed by Fannie or Freddie, there was never a risk that they would not be repaid.

For Fannie and Freddie - which own as well as guarantee mortgages - the equation is different. Their cash flow will be reduced if higher-rate mortgages they own get repaid. But if homeowners who are deeply underwater refinance into a more affordable mortgage, they might be less likely to walk way from their homes. That could reduce the losses Fannie and Freddie suffer on defaulted mortgages.

Ely points out that their cash flows will be reduced almost immediately whereas any benefit from reduced credit losses will be "harder to quantify and spread out over time."

He adds that the plan will create a "two-tiered mortgage finance system. If you are not underwater or if you are buying a house, you are going to be subject to traditional requirements in terms of credit score, loan-to-value ratios and all the documentation. If you are in deep doo-doo, you will be able to take advantage of this more liberal program."

If you fall into this refinance category contact me or most likely I will within the next 30 days especially if you are on my contact/client list. Yes, you will get a few new HARP cold calls and promises of a rosy future and drop dead rates. These are the brokers and lenders that got you into this mess to begin with so you might want to show them the door.

Everyone is making a big deal about the Kim Kardashian marriage lasting only 72 days, but who even knows who she is? Joe DiMaggio was married to Marilyn Monroe for only nine months, and Carmen Electra to Dennis Rodman for only five months. DiMaggio made a big deal of his undying love for Marilyn, and he regularly brought flowers to her grave (and made certain the press knew about it), but who does that for someone they were married to for only nine months?

Marilyn’s mother spent most of her life in a mental institution, so Marilyn was raised in foster homes and orphanages, lonely and unloved. She expressed it well when she said, "no over told me I was pretty when I was a little girl. All little girls should be told they're pretty, even if they aren't." A reminder for all parents, and especially fathers.

Italy joined Greece in spooking the markets this week, and safe-haven money again flowed into the US Treasury markets, pressing interest rates down. As fixed mortgage rates follow Treasuries, they also found some space to decline, and are within a stone's throw of record lows again. By Friday, there was some optimism that Italy was taking needed steps to short up its fiscal house, potentially averting a crisis larger than the ongoing Greek sovereign debt mess. 

Economic ramifications from these external events are one of the reasons the Federal Reserve embarked on Operation Twist better than a month ago. Coupled with a new MBS money-recycling program, the effect so far seems to be keeping interest rates fairly stable amid what might have been wider swings. In the face of gently improving economic data in the U.S., mortgage rates have settled back after a minor upward run, and continue to provide important supports to beleaguered homeowners and homebuyers alike.

Keeping low rates in play is essential to homeowners waiting for their chance to refinance. Next week, technical details of the expanded HARP program are due to be released, giving us a greater sense of the kind of participation we can expect on the part of lenders and servicers; in turn, this will strongly influence how many borrowers will engage the program. When it does begin -- and lenders are expected to be able to start accepting certain applications on or about December 1 -- it is crucial that there are early successes to report when things get underway, as bad publicity would discourage many worthy borrowers from attempting to navigate the program.

The relaxation of underwriting rules to get more homeowners into a more stable budget position is good on both an individual and broad economic basis. Additional refinancing means that many billions of dollars may potentially be freed from monthly mortgage commitments and spread around the economy, boosting growth. However, these specialized programs are limited in scope and do little to help the broader homebuying and refinancing audience, who continue to find firm underwriting standards and loan level price adjustment which drive up costs (and rates). A case could be made that if lower costs and fewer restrictions are good for selected borrowers that they should also be good for larger classes, too. For the moment, though, broad loosening of the rules is unlikely, since "riskier" loans might create more losses for the GSEs.

A slightly fuller economic calendar comes next week, when we'll get a look at retail sales, housing starts and builder sentiment, leading indicators and producer and consumer price reports. There's no reason to expect that any of them will change the interest rate picture to any great degree, and most of the focus this fall has been on the mess in Greece, Italy, Spain and thereabouts. A wobble of a couple of basis points in either direction is equally likely, but no matter, since rates will hang around these levels and just above record lows, regardless. 

High school kids sure have it all figured out!

At a high school in Montana, a group of students played a prank. They let three goats loose in the school. But, before turning them loose, they painted numbers on the sides of the goats: 1, 2, and 4.

School administrators spent most of the day looking for No. 3.