Will your lender let you do a short refinance? |
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For debt forgiveness
Lazerson believes there would be many instances in which a short refi could be demonstrated to be the best choice. He would commission two appraisals -- one for the home's fair market value and another for the home's "REO value," or real estate owned value -- what it could be expected to fetch in a quick sale after foreclosure. In neighborhoods with a lot of empty and foreclosed homes for sale, the REO value might be so much lower than the fair market value that the servicer would be willing to approve a short refi rather than foreclose.
He cites the work of Dan Immergluck, an associate professor of city and regional planning at Georgia Tech, who wrote a study concluding that each foreclosure knocks about 1 percent off the value of every house within an eighth of a mile. By that reckoning, a cluster of foreclosures can reduce surrounding home values enough to trigger more foreclosures.
Elizabeth Warren, a professor at Harvard Law School who is an expert on bankruptcy and consumer credit issues, says debt forgiveness "is our best shot for getting out of the mortgage crisis without destroying value through foreclosures. More foreclosures will only hurt the lenders and homeowners involved, they will also depress the real estate market for everyone else."
To Lazerson, it's a no-brainer: If foreclosures lead to more foreclosures, lenders should halt the snowball before it gains momentum by approving short refis.
"They just take the hit on the debt forgiveness, because they're going to take a hit anyway," Lazerson says. "In either case (foreclosure or short refi), they're going to take a loss."
Against debt forgiveness
From a mortgage servicer's perspective, a request for a short refi might sound like extortion, as if the borrower were saying, "Forgive some of the debt that I willingly took on, or I'll stop making payments altogether."
"It almost encourages everyone to say, 'Hey, maybe I'll stop making payments for a few months and the lender will refinance me,'" says Neil Garfinkel, partner in charge of real estate services for the New York-based law firm Abrams Garfinkel Margolis Bergson. "How do you prove that someone's just not gaming the system?"
That's the same question that Bitton has. It's why she has reservations about the rate-freeze plan, too.
"It's almost encouraged people to be late on their mortgages," she says.
Garfinkel's and Bitton's reservations are about moral hazard: The idea that people act recklessly if they are insulated from the consequences of their actions. Lazerson replies that moral hazard applies not only to borrowers, but to lenders, too.
"What about the moral hazard that they caused in the first place, by offering these loans for people who had no business being homeowners?" he says. "The lenders were just counting their money and they really created this whole thing. Had they not offered these loans, you wouldn't have to be choosing which borrowers are deserving or not deserving."
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