Will your lender let you do a short refinance? |
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She adds that, "occasionally, on a case-by-case basis," clients have had debt forgiven, but only after filing lawsuits.
There's no incentive for mortgage servicers to approve short refis, she says, because servicers believe they lose less money by foreclosing than by forgiving debt. And they fear that debt forgiveness would bring out the scammers.
Debt forgiveness isn't scary, but foreclosure is, and the threat of it keeps homeowners in line. "While we're seeing mass foreclosures, many (borrowers) are paying under these terms that some would call onerous," Lewis says.
Government plan benefits few
In December, the Treasury Department and HUD announced a plan to help homeowners with onerous loans, but not with debt forgiveness. The plan would aid the small number of people who could afford the introductory rates on their subprime adjustable-rate mortgages, but couldn't afford the higher payments after the rate jumped. Those people would have their introductory rates frozen for up to five years.
A homeowner taking advantage of the rate-freeze plan will end up making payments on a house that's worth less than the loan amount. That's not necessarily in the homeowner's best interest. A borrower would pay less every month if some of the debt was forgiven and the loan balance (and monthly payment) reflected the home's market value.
When you look at it that way, mortgage investors fared quite well in the plan brokered by the secretaries of Treasury and Housing. The rate freeze is friendlier to Wall Street than it is to Elm Street.
"We've really got no bailout for consumers, except through individual litigation, which is costly, but the market gets all kinds of bailouts," Lewis says. "Every effort to correct this leaves the loan whole. All the measures to figure out what to do with the people who got these loans still pay the lender for the bad behavior. It's crazy."
In December, even as the Treasury and Housing secretaries pushed a rate freeze instead of debt forgiveness,
the president signed a law, called the Mortgage Forgiveness Debt Relief Act, that cuts taxes on homeowners whose debt is forgiven.
"So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it's a really good piece of legislation," President Bush said. "The provision will increase the incentive for borrowers and lenders to work together to refinance loans -- and it will allow American families to secure lower mortgage payments without facing higher taxes."
Short refi in lieu of foreclosure
The law might give borrowers a tax break, but contrary to what the president says, it doesn't provide incentives for lenders to refinance with debt forgiveness instead of foreclosing. The law doesn't give lenders and mortgage servicers tax breaks or subsidies for approving short refis.
It's hard enough to get a short refi as it is. A homeowner has to be past due for demonstrable reasons, with few prospects for catching up by reducing expenses or increasing income. A foreclosure is the outcome of most such cases. Or the homeowner can surrender title and move out voluntarily in what is called a deed in lieu of foreclosure.
In other cases, the servicer might approve a short sale -- a sale of the house for less than the loan balance, with the remaining debt forgiven. Or, if the homeowner is persistent and lucky, a short refi might be arranged.
A short refi won't happen unless the homeowner is willing to undergo a financial review and permit an appraisal with inspections inside and out. All stakeholders -- the servicer, borrower, mortgage insurer and any lender extending a second mortgage -- would have to approve a deal, agreeing that a short refi would lose less money than other options.
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