NEW YORK - August 2, 2010 - Analysts at the investment bank Keefe, Bruyette & Woods (KBW) added to the growing consensus of voices skeptical of a government-backed refinancing wave.

Recent record-low mortgage rates have sparked fears amongst investors that a government-driven refinancing wave would boost prepayment speeds back to 2003 levels. According to KBW, there is a cost to such a policy shift, contrary to what supporters of action have said.

The agency mortgage-backed securities (MBS) market trades a premium of almost seven basis points. If all borrowers refinanced into the current mortgage rates, roughly $350 billion would transfer from bondholders to borrowers, equaling $75 billion annually.

"The costs will clearly outweigh the benefits of this program,” according to KBW. "This is unlikely to be a zero sum transfer of wealth because mortgage spreads would almost certainly widen, so the benefit to the borrowers would be lower than the theoretical benefit implied by current mortgage rates."

KBW, like Barclays Capital, Credit Suisse and JPMorgan, said such a program would face significant logistical hurdles. But most importantly, KBW said the cost to the government-sponsored enterprises (GSEs) and the government would spread to the banking system at roughly $70 billion.

"Since much of this is dispersed among mutual funds, hedge funds, mortgage REITs, banks, etc., the pain would be spread out. However, one obvious sector which would be negatively impacted is the banks," according to KBW.

KBW believes the better option would be an expansion of the Home Affordable Refinance Program (HARP) by the GSEs waiving some fees and other restrictions on high-risk loans.