Obama Win Could Lead to Lower Rates, but for Bond Investors...

Investors fear Obama's re-election will lead to more refinancing.

President Obama's re-election is fueling investor concern that homeowner refinancing is set to increase after debt yields tumbled and amid speculation his administration will pursue more aggressive measures to boost the housing recovery.

Real estate investment trusts that buy mortgage debt tumbled the most in a year yesterday on the expectation that more homeowners would be able to prepay mortgages.

The companies are also being pressured because lower yields on new investments would squeeze the firms' earnings and dividends. The policies of Obama and the Federal Reserve, whose chairman Republican challenger Mitt Romney had said he would replace, have expanded opportunities for homeowners to qualify for new loans while sending borrowing costs to record lows.

"The continuation of the policies that started last year or so are basically assured now," said Vitaliy Liberman, a portfolio manager at Los Angeles-based DoubleLine Capital LP, which oversees more than $45 billion.

Government-backed mortgage bonds used by lenders to package and sell new loans rallied yesterday along with Treasuries, on speculation Obama's win will make it tougher for politicians to avert a so-called fiscal cliff of spending cuts and tax increases, fueling a flight to the safety of government securities, and make it easier for the Fed to support the economy by buying the debt and restraining short-term rates.

Obama's administration may do more to boost housing, which led the U.S. into recession and is now rebounding after a six- year slump. That recovery helped the president win in swing states such as Nevada and Colorado.

This includes expanding programs to help homeowners refinance, including the Home Affordable Refinance Program for borrowers with little or no home equity. Obama also may consider replacing the acting overseer of Fannie Mae and Freddie Mac, who has opposed principal forgiveness on loans they guarantee.

"We view housing as a clear winner following the election results," said Edward Mills, an analyst at FBR Capital Markets.

Still, even as housing has shown signs of improvement, 10.8 million Americans owe more on their mortgages than their homes are worth, according to CoreLogic Inc., 3.8 million home loans are at least 90 days delinquent, according to the Mortgage Bankers Association, and prices are still 29 percent below the July 2006 peak, according to the S&P/Case-Shiller Index.

"We've been through a very challenging time and there's a lot of people still struggling out there," said Bill Roth, chief investment officer at Minnetonka, Minn.-based Two Harbors Investment Corp., a mortgage REIT with $15.3 billion of assets. "The administration is still very focused on helping homeowners, helping borrowers, putting more money in people's pockets."

Two Harbors, which has some investments that could benefit from housing gains, has also bought prepayment-protected Fannie Mae and Freddie Mac securities that will help it avoid having to reinvest in debt at lower rates. It increased its holdings of bonds backed by loans that have already been through HARP and are now excluded from tapping the program again, by $2.1 billion last quarter.

Bondholders paying more than face value for securities risk losses if enough homeowners take out new mortgages to repay their existing debt.