Exxon, Nabors ride reversal, energy stocks up

NEW YORK (MarketWatch) — Oil-service firm Nabors Industries and Exxon Mobil led a late-day reversal in energy stocks on Monday, while shares of French conglomerate Total SA lagged.

Exxon Mobil Corp. XOM +0.17%  and Chevron Corp. CVX +0.76%  rose 1.2% and 0.8% respectively, as buying took hold in the broad equities market. The Dow Jones Industrial Average DJIA +0.63%  rose 69 points.

Among the big gainers in energy stocks, Nabors Industries NBR +3.45%  jumped 3.5% as the top performer in the Philadelphia Oil Service Index.

Meanwhile, Total SA TOT -1.45%  fell 0.8% as French banks fell hard in European trading on growing speculation about a cut in debt ratings by Moody’s.

Checking the main indexes in the energy sector, the NYSE Arca Oil IndexXX:XOI +0.13%  rose 0.1%, the NYSE Arca Natural Gas Index XX:XNG +0.24%  added 0.2% and the Philadelphia Oil Service Index OSX +1.63%  moved up by 1.6%.

Separately, Hess HES +0.43%  , Petrobras PBR -0.72%  and Total SA received buy ratings from Tudor Pickering Holt as part of an initiation of coverage of nine integrated oil companies by the Houston-based energy research firm.

Analysts Robert Kessler and Brandon Mei said the group offers a respectable return potential and appears to be cheap, based on price-to-earnings ratios.

Royal Dutch Shell RDS.A -1.41%  , Chevron CVX +0.76% and BP BP +0.22%  received accumulate ratings; ConocoPhillips COP +0.02%  , Statoil ASA STO +1.81%  and Exxon Mobil XOM +0.17%  drew hold ratings.

Steve Gelsi is a reporter for MarketWatch in New York.

Canadian stocks sink 1.9% on European debt fears

SAN FRANCISCO (MarketWatch) — Canadian stocks ended down 1.9% on Monday, its third straight session of losses, on fears over Europe’s deteriorating debt problem after chatter about a possible Greek default picked up pace.

The S&P/TSX Composite IndexCA:$ISPTX -1.93% tumbled 238.71 points to close at 12,148.80.

German Economy Minister Philip Roesler told Die Welt that an “orderly default” by Greece can’t be ruled out, and news reports over the weekend said the German government is taking steps to shore up its banking sector in the event of a Greek default. Read about Greek default fears

Most sectors finished weaker, led by the S&P/TSX Capped Diversified Metals and Mining Index which tumbled 3.9%. The S&P/TSX Capped Materials Index slumped 3.2% and the S&P/TSX Capped Energy Index declined 2.1%.

Gold miners were some of the biggest laggards with Goldcorp Inc. CA:G -4.30%  retreating 4.3% and Yamana Gold CA:YRI -3.02%  down 3%. Teck Resources CA:TCK.B -3.57%  fell 3.6% and Suncor Energy CA:SU -3.19%  declined 3.2%.

The S&P/TSX Capped Information Technology Index was the only sector to close in the positive territory, helped by BlackBerry-maker Research In Motion RIMM +0.10%  CA:RIM +1.56%  which gained 1.6%.

In the currency market, the Canadian dollar firmed with the U.S. currency USDCAD -0.02% buying 99.33 Canadian cents compared with 99.53 cents late Friday.

Sue Chang is a MarketWatch reporter in San Francisco.

Stocks suffering, but crash fears recede

NEW YORK (MarketWatch) — Another down week, but now even permabears think the storm may be passing.

Two weeks ago, these letters had real fear of another 2008-style Crash ( See June 6 column. ) They’re still not happy, but they’re impressed that the world has not ended.

Dow Theory Letters’ Richard Russell wrote on Friday morning: “From a Dow Theory standpoint, I thought the action of the Dow Jones Transportation Average DJT -0.16% was significant. Not only did the Transports refuse to follow the Dow Jones Industrial Average DJIA +0.63%  down, but the Transports actually rallied. …Thus, the Transports are giving the lie to the frightening performance of the Industrials.”

Even after Friday’s bad break, he merely wrote: “Dow at new low for the move, unconfirmed by the Transports. … I’m keeping my eyes on those March lows. One or the other (Industrials or Transports) better hold.”

Dennis Slothower of Stealth Stocks Daily was out of the market for the 2008 Crash and is 100% in cash now. But on Friday, he was relatively optimistic, by Slothower standards, if characteristically conspiratorial:

“While it might be easy to fall into the trap that the next recession will soon be here, let’s not get too spooked. With prices staying above the 200-day moving averages after multiple tests by the bears, it suggests that the dealer banks may merely be letting the spooked traders give up their shares at this currently discounted level before the banks push it up one more time.”

“The [200-day moving average] has to be breached if the bears are going to take control. Since that hasn’t happened yet, it suggests the fear level is being contained.”

Slothower’s cynical, but short-term-bullish conclusion: “The bulls (i.e., the banks) could quite easily push during this end of June / early July window-dressing period to fake out traders and get them to jump on the train that would clearly look like it is leaving the station. After all, the banks can create another dump in July, after the July payroll report, if they choose to — where I am leaning.”

One letter with a strong post-Crash record that has shown itself capable of both bullishness and bearishness is New World Investor, edited by Michael Murphy. ( See March 10 column. )

Last week, he made a similar argument: “One reason I am still bullish is that the long-term weekly chart still looks great. … I know other newsletter writers are trying to scare you with stories about the terrible stuff that will happen when QE2 ends next week. But I think that’s been the main worry since March, and the bears have not been able to break this market below the S&P 500 Index SPX +0.70%   1,230-1,250 area, or even the 200-day moving average, now at 1,260.”

In a striking move, Murphy is getting out of gold, although he makes it clear in chart-speak that this is purely tactical: “Gold moves in daily, intermediate and four-year cycles, and follows a very clear A-up, B-down (but not below where A started), C-big up and D-sharply down wave structure. I expect two or three more of these cycles before the whole move is over in 2016-2018. It is always easier to catch the bottoms than the tops of the A- and C-waves, so I expect we’ll be back in these ETFs very near the bottom.”

“For now, sell the Market Vectors ETF Trust Market Vectors Gold Miners GDX +0.14%  , Market Vectors Junior Gold Miners ETF GDXJ +0.30%   and the Global X Silver Miners ETF SIL +0.67%   for gains, and ProShares Ultra Silver AGQ +1.91%   for a loss. You do not need to sell our individual miners, which have news coming to drive them higher.”

5 retirement tactics in a low-interest-rate world

BOSTON (MarketWatch) — Interest rates are down and inflation is up. For retirees who depend on interest income from their fixed-income investments to pay living expenses, these are rock-and-a-hard-place times.

The yield on the 10-year U.S. Treasury note is about 2%, or one-half its yield in February. The yield on the two-year note is 0.22%, about two-thirds its yield at the beginning of 2011. Meanwhile, inflation has risen 3.63% over the 12 months ending July 2011.

Let’s put this in perspective. If in February you had a $500,000 portfolio of 10-year U.S. Treasury notes throwing off $20,000 in income to fund your living expenses, and for some reason you had to reinvest all that money in the 10-year notes being issued today, your portfolio would generate only $10,000 in interest income. Meanwhile, the cost of goods and services that your $20,000 in interest income once paid for has now risen to $20,600.

In other words, to maintain the very same standard of living you need to generate another $10,600 in interest income — which is impossible to do without taking on more risk — and/or start dipping into your principal, which could put your living standard in jeopardy later in life. Or you might consider reducing your standard of living today and wait for interest rates to rise again.

What’s a retiree to do?

Identify, prioritize your risks

Among the items high on your to-do list: Get a handle on the risks you will face in retirement — be they longevity, inflation, interest rates, and/or the stock market. Next, determine which of those risks will have the greatest impact on your retirement, and then develop a plan to deal with it or them.

Doing this on the fly, while you’re in a state of duress, isn’t ideal but it’s better than making rash decisions and chasing yields only to expose yourself to another risk for which you are unprepared. If you already have a strategy in place, now would be the time to revisit what, if any, changes you might want to make to your plan. Planning for interest-rate risk is one thing; living through it with real money at risk is a whole nother story.

Revisit your expenses

We often think of fixed expenses in retirement as being just that — fixed. But experts, including Dan Weinberger, a vice president of retirement product strategy and behavioral finance at MetLife, suggests that retirees should use this low-interest-rate environment to revisit their fixed and discretionary expenses.

“It’s tough. People will be faced with hard decisions,” Weinberger said.  “People don’t want to compromise on essential expenses. People aren’t afraid of making compromises on wants — but not on needs.”

It might be that you can cut some expenses that are more “wants” than “needs,” and thus reduce the need to make up lost interest income. “Now is a good time to figure out what’s essential and what’s not,” said Craig Lemoine, CFP, an assistant professor of financial planning at The American College.

Lemoine noted that the low interest rate environment is a double-edged sword: Interest rates on investments are low but so, too, are rates on loans. “Now would also be a good time to take advantage of opportunities to refinance your mortgage or unsecured debt,” Lemoine said.

Now might be a good time to consider a reverse mortgage, Weinberger said. The reverse mortgage, even if you don’t use it right away, would have a low interest rate and could be a source of much-needed money to pay for living expenses at some point.

For his part, Dan Keady, director of financial planning for TIAA-CREF, recommends a two-part strategy for retirees looking to generate income. First, retirees ought to determine their monthly income needs for the basics — food, housing, and the like — and see how much of that Social Security and existing pensions will cover. Second, retirees should consider “annuitizing enough of [their] savings to create a guaranteed income floor to take care of those basic expenses,” Keady said. (More about annuities in a bit.)

Tax relief for some Irene victims

SAN FRANCISCO (MarketWatch) — People reeling from the effects of Hurricane Irene will get a little more time to file their tax returns and estimated payments normally due in September and mid-October, the IRS said Thursday.

People in certain parts of North Carolina, New Jersey, New York and Puerto Rico will have until Oct. 31 to file tax returns and make estimated tax payments, the IRS said. Normally, individuals and sole proprietors who filed for an extension on their income-tax return in April are required to file by Oct. 17 (generally it’s Oct. 15 but that’s a Saturday this year).

Businesses who requested an extension on their corporate return face a Sept. 15 deadline in general. But for businesses in a Hurricane Irene designated disaster area, the deadline is now Oct. 31, as long as their “principal place of business” is in one of the designated areas, said Ellen Minkow, a certified public accountant in New York.

Another group also gets some relief: Taxpayers making estimated tax payments for the third quarter this year. “Those payments would normally be due on Sept. 15,” said Erik Lammert, an attorney in Appleton, Wis. “The deadline for those is going to be extended to Oct. 31 also.”

Meanwhile, the IRS also said Thursday it would give a one-week filing extension to some taxpayers whose tax preparers got hit by the storm. Specifically, those returns normally due Sept. 15 won’t be due until Sept. 22, if the tax professional was affected by the storm. Read more about tax relief in disaster situations on IRS.gov.

“The taxpayer’s preparer must be located in an area that was under an evacuation order or a severe weather warning because of Hurricane Irene, even if the preparer is located outside of the federally declared disaster areas,” the IRS said. “This relief, which primarily applies to corporations, partnerships and trusts that previously obtained a tax filing extension, is available to taxpayers regardless of their location.”

WHAT ABOUT VERMONT, OTHER STATES?

Noticeably absent from the deadline-extension announcement: Vermont, where flooding has been severe, but the IRS said “other locations are expected to be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA).” See the announcement on IRS.gov.

“They will probably be adding other states — I can think of Vermont as an example — very soon,” Lammert said.

“FEMA has to make damage assessments and then pass those on to the IRS, and then the IRS makes the determination as to whether they’re going to extend the deadlines for other areas as well,” he said.

Separately, taxpayers who have unreported bank accounts overseas who are hoping to take part in the IRS’s partial amnesty program also got an extension of time to apply, the IRS said recently. That deadline extension applies to all taxpayers, whether or not they live in a disaster area. Read more: Hurricane Irene pushes IRS to extend tax deadline.

Read more: How to cut costs when coping with disaster.

PENALTY WAIVED FOR EMPLOYERS

Also, the IRS said it would “waive the failure-to-deposit penalty for employment and excise tax deposits due on or after Aug. 26 and on or before Sept. 12,” Minkow said.

As long as businesses make those deposits by Sept. 12, she said, they won’t face the penalty.

“Say you’re making payroll last week. Usually you have three days to file,” Minkow said. “Now they’re giving you [about] two extra weeks.”

Andrea Coombes is MarketWatch’s personal finance editor, based in San Francisco.

U.S. stocks break higher on Italy hopes

The Dow Jones Industrial Average DJIA +0.63%  closed up 68.99 points, or 0.6%, to 11,061.12, led by a 2.9% gain in Intel Corp. INTC +2.99%  shares. Twenty-two of 30 Dow components rose.

Francesco Guerrera details his recent tour of Europe and discusses the delicate economic climate. Also, Randy Forsyth on why you shouldn’t expect much from Barack Obama’s or Ben Bernanke’s economic plans.

The blue-chip index had fallen more than 167 points, and traded lower for much of the trading session, as the latest barrage of headlines about Europe suggested it was more likely one or more euro-zone members would default on its debt.

But the indexes came off their lows after the Financial Times reported Italy was in talks with China’s sovereign-wealth fund over a sale of Italian bonds. Read more on Italy and China.

“[Italians] would have a buyer they know they can turn to,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC.

Details of the deal were lacking, but that didn’t stop markets from interpreting the report as a sign Italy, a much larger economy than the countries that have been bailed out so far, might avoid Greece’s destiny.

“The market was looking for anything positive to come out of the European debt crisis,” added Luschini.

The day’s gains showed stock indexes bouncing off some recent low points.

The S&P 500 Index SPX +0.70%  ended up 8.04 points, or 0.7%, at 1,162.27, led by tech and financial stocks, after falling as low as 1,136.07. The day’s gain kept the index of large-cap U.S. stocks above lows touched last week.

“They made a run for technical support at 1,140 to 1,141; we’ll see if it holds,” said Robert Pavlik, chief market strategist at Banyan Partners LLC.

The Nasdaq Composite Index COMP +1.10% ended up 27.10 points, or 1.1%, at 2,495.09.

Providing some support to tech stocks, chip manufacturer Broadcom Corp. BRCM -1.11% said it would pay $50 a share for NetLogic Microsystems Inc. NETL -0.15%  to extend its product line with new processors. The Philadelphia Semiconductor IndexSOX +3.03%  gained 3%. Read more on technology stocks.

B. of A. highlights rebound in financial stocks

SAN FRANCISCO (MarketWatch) — Bank of America Corp. shares gained 1% in volatile trade on Monday as financial stocks recovered following a report that Italy has turned to China for financial assistance.

Bank of America BAC +0.43% said early Monday that it would eliminate 30,000 jobs as part of its effort to save $5 billion a year by 2014. Read more about B. of A.’s job cuts.

The announcement did little to stabilize Bank of America shares, which seesawed most of the session as majority of financial stocks suffered on concerns about European banks’ exposure to Greece.

However, a report in the Financial Times that Italian officials are negotiating with Beijing for China to buy Italian bonds helped lure investors back to the stock market. Read about Rome courting China

Major banks including Citigroup Inc.C +0.30% and J.P. Morgan Chase and Co.JPM +0.03% , which had wallowed in negative territory, closed higher.

Shares of Goldman Sachs Group Inc.GS +0.48% also rose 0.7% to close at $102.92 after falling below $100 on an intraday basis for the first time since March 2009.

Meanwhile, Berkshire Hathaway Inc. BRK.B +2.17%   BRK.A +1.59% , Warren Buffett’s huge investment vehicle, named Ted Weschler to help manage the firm’s equity portfolio. Berkshire’s A shares rose 1.5%.

Buffett and Weschler reportedly became acquainted when the then Charlottesville, Va.-based hedge-fund manager won an eBay auction of a lunch date with the legendary investor. See related blog item at WSJ.com

Berkshire Hathaway has hired a new equity portfolio manager — and not much is known of him, beyond the unusual manner in which he got Warren Buffett’s ear.

Weschler joins Todd Combs, who was hired last year, as part of a plan to prepare the company for the eventual retirement of Buffett.

“These two investment managers will each have responsibility for a segment of Berkshire’s present equity holdings,” according to a Berkshire statement.

The Financial Select Sector SPDR ETFXLF +0.16% , which tracks the financial stocks in the S&P 500 Index SPX +0.70% , added 1.1%, and the KBW Bank Index ETF KBE -0.60%  climbed 1.7%.

What to look for in a dividend mutual fund

BOSTON (MarketWatch) — Conventional investment wisdom for at least the last half century has been simple: Use stocks for growth and bonds for income.

That’s been accepted practice in large part because the yield on the 10-year Treasury note has been higher than the dividend payout on the Standard & Poor’s 500-stock index SPX +0.70%  for most people’s investment lifetime.

In late August, however, for the first time in 53 years, the S&P 500 yielded more — roughly 2.25% — than the 10-year Treasury (2.1%), and that has some investors looking more than ever to use dividend-paying stocks to deliver income.

The bullish view would be that companies are raising dividends because they have too much cash to know how to put it all to work; the bearish view would suggest that they’re scared to put the cash they have to work in these economic conditions, so they’re paying it out.

Bulls and bears can argue about the whys and wherefores, but both sides are at least intrigued by the idea of cashing in on the trend. Read more: 10 hot dividend stocks for a cold market.

Yield signs

Pundits and analysts have been suggesting that long-term investors consider generating a greater chunk of their income from stocks for awhile now. No one should confuse yield with safety; higher yields can help to minimize market losses, but they won’t be much comfort in a downdraft.

For investors, making a dividend play in mutual funds is trickier than simply picking solid stocks and hanging on for the quarterly payout. For starters, few people pay much attention to the yield on a fund, especially since distributions are often considered more of a tax headache than an actual benefit of ownership.

Moreover, most mutual funds — even those with “income” in their name — pay distributions just once a year; an investor in such a fund won’t have the same feeling as someone who buys stocks to collect dividends every quarter. And because a fund’s holdings can change on a moment’s notice, the yield an investor sees when looking at recent statistics or in a fund’s paperwork could be different than what they actually get. (Right now, with dividend yields on the rise, that might actually work in the favor of shareholders checking yields.)

“While some yields on individual blue chips make buying them a small-brainer — if not a no-brainer — buying a blue-chip fund and assuming the yield will be similar would be a mistake,” said Jim Lowell, editor of the ETF Trader newsletter, a service of MarketWatch, the publisher of this report, and the Fidelity Investor newsletter.

While this would argue for fund investors tilting towards individual quality stocks, rather than funds, Lowell noted that, “There are a handful of uniquely well crafted, positioned and managed funds that offer reasonable yield based on their holdings’ underlying dividend distributions.”

Star search

Finding those funds isn’t always easy. The search — as with most efforts to sort funds — starts with costs. If dividend distributions are a big part of the reason to buy, then costs are particularly important because the dividend pool is the first place funds go to cover their expense ratios, before anything flows to shareholders.

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Dividend Stocks Pay Rewards

Michael Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds, says investors should focus on dividend-paying stocks as global markets grapple with persistent political and economic uncertainty. Jonathan Burton reports.

Next, an investor has to decide where they are willing to go to get dividends. The big yields today are coming from certain industries, notably financial services, real estate investment trusts, energy and utilities. Many investors get queasy thinking about those businesses in this economy — particularly financials and REITs — and would prefer to stay away.

That’s easy to do when you’re picking individual stocks, but a lot tougher with funds.

Likewise, closed-end funds and some ETFs have compelling yields, but they may use enough leverage to move them from the realm of “stable, income-producing investment” into something more volatile and edgy.

“There are a lot of ways to get dividend yield in funds, but most people will want to go into something that has low volatility, that isn’t leveraged, and that isn’t in industries they’re uncomfortable with,” said Michael Falk of Michael S. Falk Asset Consulting in Chicago. “If all they do is look at a yield number, they are setting themselves up for a possible problem.”

To find dividend-paying funds and ETFs, experts suggest looking for yields equal to the S&P 500 or better, and noted that value-oriented plays may make the most sense, if only because income investors who pursue a dividend strategy typically need to be extra careful about overpaying to get yield. Likewise, knowing how and where a fund generates its dividends — looking at the underlying portfolio — will be key to getting comfortable with it.

Said Lowell: “There are a handful of uniquely well crafted, positioned and managed funds that offer reasonable yield based on their holdings’ underlying dividend distributions.”

Ask a few experts for their dividend-fund picks — as I did — and you’ll routinely get names such as Vanguard Equity-Income VEIPX +0.51% , Vanguard High Dividend Yield Index VHDYX +0.50% , Vanguard Dividend Growth VDIGX +0.43% , American Funds Washington Mutual AWSHX +0.50% , Tweedy Browne Worldwide High Dividend Yield ValueTBHDX -1.38% , BlackRock Global Dividend Income BABDX -0.77%  and Aston/River Road Dividend All Cap Value ARDEX +0.50% .

You’re invited! “Finding the Right Exchange-Traded Funds” is the topic of a MarketWatch panel discussion set for 9 a.m. Wednesday, Sept. 21 in Chicago, hosted by MarketWatch columnist Chuck Jaffe. Join us for this breakfast event featuring the expertise and analysis of Michael S. Falk of Michael S. Falk Asset Consulting in Chicago; David Trainer, president of New Constructs Inc. in Nashville; and Scott Burns, Director of ETF, Closed-End and Alternative Fund Research for Morningstar Inc. They’ll discuss how to evaluate your investment strategies and navigate the increasingly complex world of ETF products. If you’d like to join us for this free event, email your RSVP to wsjdnevent@dowjones.com by Monday, Sept. 19.

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.

Intersil finds higher ground in after-hours trade

LOS ANGELES (MarketWatch) — Intersil Corp. shares rose Monday evening, finding higher ground after the company cut its quarterly revenue forecast, while NetLogic Microsystems Inc. shares slipped following their record-setting dayside rally in the wake the company’s pending acquisition by Broadcom Corp.

Chip maker Intersil said it now expects its third-quarter revenue of $184 million to $188 million, down from its previous forecast for $205 million to $213 million. Analysts polled by FactSet Research currently expect revenue of $209.6 million. Intersil cited weaker-than-expected demand during the period as reason for its reduced outlook.

“We believe this is the result of broad-based economic weakness, along with some excess inventory consumption,” said Intersil’s Chief Executive Dave Bell in a statement.

“However, we now see signs that inventory is stabilizing, with bookings likely recovering to consumption rates during the remainder of the third quarter,” Bell said.

The company’s shares ISIL +4.18%  rose 4.2% to $11.10 in active volume. Intersil also reiterated its expectation for third-quarter net earnings to be impacted by $8 million in non-cash costs related to long-term debt refinancing. The third-quarter report is slated for release Oct. 26.

The online megaretailer is talking with book publishers about launching a Netflix-like service for digital books. Is this a smart move? AllThingsD’s Peter Kafka weighs in.

Late-traded NetLogic NETL -0.15% shed 0.2% to $48.02. The stock surged 50.8% to $48.12 in the regular session, their best closing price since going public in 2004, after Broadcom BRCM +0.03%  said it will purchase NetLogic for $3.7 billion. Broadcom seeks to bolster its portfolio in the market for communications processors.

Shares of Broadcom edged up a penny in evening trade to $33.07. They ended regular-session trading down 1.1%.

The purchase price for NetLogic, at $50 a share, represents a 57% premium to NetLogic’s closing price on Friday. Read more about the Broadcom/NetLogic deal.

On the broader U.S. equity market, stocks staged a rally in the final minutes of the regular session. Stocks had been down for the bulk of the day on heightened worries that Greece will default. But the key indexes attempted to close with slight gains. Read about Monday’s action in U.S. stocks.

The Dow Jones Industrial Average DJIA +0.63%  ended up 69 points, or 0.6%, to 11,061.12 and the S&P 500 Index SPX +0.70%  rose 8 points, or 0.7%, to 1,162.27. The Nasdaq Composite Index COMP +1.10%  moved 27 points, or 1.1%, higher to 2,495.09.

Quarter of U.S. mortgages could get help

WASHINGTON (MarketWatch) — Almost a quarter of all U.S. borrowers could eventually gain access to an Obama administration program to refinance mortgages to obtain lower interest rates, analysts say.

At issue are millions of so-called “underwater” borrowers who owe more than their home is worth and can’t refinance to current low rates using traditional means.

Rep. Brad Miller discusses lawsuits that federal regulators filed against 17 major banks for billions of dollars in losses on mortgage securities bought by Fannie Mae and Freddie Mac.

The Obama administration’s Home Affordable Refinance Program, or HARP, has sought to provide refinancing options to some of these underwater borrowers who have no equity in their homes as long as that mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants.

HARP currently only allows borrowers to refinance at lower rates with a mortgage that is at most 25% more than their home’s current value.

However, that may soon change and millions more could be eligible. The Federal Housing Finance Agency, the regulator for Fannie and Freddie, said last week it’s analyzing whether it would allow borrowers who are even more underwater -— those homeowners owing even more than that cap — to participate. Read about how the regulator for Fannie and Freddie is considering an expansion of the refinance program

Roughly 9.8 million mortgages, or 25% of all U.S. homeowners have home-loans that are 20% or more underwater, according to statistics compiled in June by RealtyTrac. In addition, almost half of all U.S. home-loans — 16 million of the 40 million U.S. mortgages — are underwater, RealyTrac reports.

However, the largest chunk of underwater mortgages, 61%, are in the category of 20% or more underwater.

The new effort comes after President Barack Obama last week said in a broader speech on the economy and jobs that the administration is working with regulators to help people with underwater mortgages to refinance at current rates, which are currently just north of 4%.

However, a Sept. 11 report by Keefe, Bruyette & Woods notes that a chief impediment to refinancing these super-underwater homes would be that the mortgages do not qualify for securitization even with a Fannie and Freddie guarantee.

Analysts at J.P. Morgan said Friday that they believe changes to HARP are coming, but those changes will happen in “weeks” rather than days.

Put-back risk

However, both groups of analysts believe another idea that has been floated to encourage banks to refinance underwater mortgages is likely off the table.

At issue is an approach also known as reps and warrants relief that would indemnify lenders from “putback” risk when it comes to mortgages refinanced using the HARP program.

Putback risk represents the possibility that the loan originator will have to repurchase the loan from Fannie and Freddie because the underwriting violated GSE guidelines. Lenders may be more likely to refinance using the program if they know they are off the hook for any loan misrepresentations.

“There is no explicit mention of reps and warrants relief, which we continue to believe it is extremely unlikely,” J.P. Morgan Securities said in a Sept. 9 report.

The KBW report also said they also believed that relief is unlikely to be provided, in part, because it would increase the credit risk for Fannie Mae and Freddie Mac and taxpayers.

Donald Lamson, a former Office of the Comptroller of the Currency official and an attorney with Shearman & Sterling LLP, said there is little incentive on the part of lenders and investors to refinance underwater borrowers who continue to be current on paying their mortgages.

“If I’ve got a borrower who is paying a 6% loan as agreed and the person wants to come down to 4%, you can say your security isn’t good enough. There is little incentive on my part as a lender to help you out,” Lamson said. “The borrowers are captive. The lender says I like a 6% coupon more than a 4% coupon.”

He added that FHFA may be reticent to agree to put-back relief because it could result in higher losses for taxpayers and looser underwriting practices by banks.

In the worst case, banks may be tempted to return to making low downpayment loans without verifying the income of borrowers with lower credit ratings, or other poor practices, knowing the institution wouldn’t be required to buy back the loan for violating Fannie and Freddie underwriting guidelines, Lamson said.

Ronald D. Orol is a MarketWatch reporter, based in Washington.