Short Refinancing: Really An Option?

I received a press release last week about a company providing short refinancing. It’s similar to a short sale — convincing your mortgage lender to accept whatever you can get in a sale of your house — in that your mortgage lender has to be willing to take less than what you owe for your debt, often significantly less. In a short refinancing, a homeowner refinances a mortgage for less than what is currently owed and the lender forgives the difference between the new loan and the old.

It sounds great on the surface: homeowners get to stay in their houses, lenders get at least a portion of what they’re owed and everyone is happy. At least, that’s the way this press release (from a mortgage company specializing in short refinancing, of course) made it sound.

The realities of short refinancing are a little more complicated. It is one of many options a homeowner might have — and from the homeowner’s point of view it can be a very good one. But while a homeowner might like the idea, most lenders don’t. The simple fact is that most lenders just don’t like the idea, because they’ll face substantial losses on any short refinancing. Lenders can’t afford short refinancing unless there’s just no other way to still make a few dollars off of a house. Even a short sale is preferable — after all, the homeowner that has already proved that he can’t manage a mortgage will be out of the picture.

Advocates of short refinancing have argued that lenders should at least consider the option because of the potential of a lender winding up with houses sitting empty and unsold. But a lender can afford to foreclose on a home and let it sit empty for a few months, if they can sell it for enough money to cover costs down the road. It’s like flat out debt forgiveness — it’s just not an option that lenders can exercise often and still stay in business. Many lenders are also concerned that if short refinancing becomes a more common option, homeowners will try to take advantage of that fact. Foreclosures are scary — homeowners will work hard to avoid them — but the opportunity to reduce the amount a homeowner owes on a mortgage just sounds like a good deal.

It is possible to get a short refinance through absolute persistence, as long as the homeowner can prove that he can’t catch up by reducing expenses or increasing income, as well as can prove that he could meet the payments of a refinanced mortgage. A financial review and appraisal are the bare minimum requirements. But short refinancing remains rare. Companies that promise to negotiate short refinances for homeowners are — at best — overly optimistic. I’ve taken a look at several websites for such companies and I know I wouldn’t put my home in their hands. I’d recommend that any homeowner trying to get a short refinance to research their lender’s policies thoroughly and set up meetings to discuss the prospect on their own.