Will your lender let you do a short refinance?
|By Holden Lewis
A mortgage broker has an idea for reducing foreclosures: Encourage lenders to forgive debt. So far, the notion hasn't gained traction.
Jeff Lazerson, founder and president of the online brokerage Mortgage Grader, believes that some foreclosures could be prevented if delinquent borrowers could refinance their loans, but with some of the debt forgiven. This type of transaction, called a short refinance or short refi, is rare. Lazerson wants to set up a streamlined system to make short refis more common.
Greatly simplified, this is how a short refinance works: You owe $200,000 on a house that you bought at the top of the market. Since then, house values in your neighborhood have fallen by 20 percent, and your house is now worth $160,000. The rate on your subprime adjustable-rate mortgage has gone up, and you can't afford the higher payments. Instead of foreclosing, the lender agrees to forgive $40,000 of the debt and refinances the mortgage for $160,000 -- a loan you can afford.
"The lenders are going to take a hit anyway," Lazerson argues. "The biggest thing this does is prevent the number of documented foreclosures happening in a neighborhood and causing the values to deflate. It keeps people in their homes."
'No' from all sides
Lazerson is pushing for his company to be part of the solution. He proposes to have Mortgage Grader negotiate short refinances on behalf of borrowers who otherwise would lose their homes through foreclosure.
The Department of Housing and Urban Development, or HUD, provides funding to some housing counseling agencies, and Lazerson asked HUD to direct those agencies to refer their foreclosure-bound clients to him. Under the proposal, Mortgage Grader would have received $1,495 for each successfully negotiated short refi.
HUD declined because it doesn't endorse mortgage companies and didn't have the money. Lazerson approached the
Hope Now coalition of housing counselors and mortgage servicers, which turned him down without explanation. The coalition didn't respond to a request for comment.
Why should Mortgage Grader make these deals? Lazerson represents his company as one of the good guys -- the only
for-profit member of the inchoate Fair Mortgage Collaborative, and recipient of a
Ford Foundation grant "for an innovative underwriting tool
matching primarily low-income and minority homeowners with the least costly mortgage product." He has sought a
patent on Mortgage Grader's process, which he says eliminates racial discrimination and "downstreaming" -- pushing
borrowers into subprime loans when they are eligible for lower-rate prime loans.
Even if he did get the go-ahead to negotiate short refis, Lazerson might meet with nothing but frustration.
"They can't make the banks do it, No. 1," says Ellen Bitton, owner of New York-based Park Avenue Mortgage. "No. 2, who is going to be the banker who says, 'OK, I'm going to take this loan that's in foreclosure, and I'm going to refinance it and take a $100,000 hit?'"
Debt forgiveness a rarity
Few bankers will willingly do that, attests Michelle Lewis, president of Northwest Counseling Service, an agency in Philadelphia that helps homeowners who are in danger of foreclosure. She says she's all for negotiating debt forgiveness.
"And that's been something we've been working on for years -- but we have had no success,"