Short refinances should be the norm. They keep the homeowner in their home AND they reduce losses for the lender AND they improve the economy since home ownership stimulates economic growth.
A short refinance keeps the homeowner in their home, thus reducing the supply of homes on the market . Short sales result in the homeowner losing their home; the loss of the American dream and creates economic disaster for everyone.
A short refinance entails the current lender or lenders forgiving debt based upon the current market value of the home. The homeowner then refinances the remaining debt into a new mortgage. For example, a home is currently appraised at $200,000. The homeowner owes $275,000. 95% of the current value is $190,000. The difference between $190,000 and $275,000 is $85,000. The current lender(s) forgive the $85,000, enabling the homeowner to refinance the remaining $190,000 into a new mortgage.
As you can see, a short sale does the SAME action as a short refinance: a forgiveness of debt, BUT with a short sale, a stranger buys the home and the homeowner loses their home AND the supply of homes increases. Lenders suffer larger losses, as well, with a short sale since they are typically sold for less than 95% of current value. A short refinance keeps the homeowner in their home.
Now, we could take this one step further and SAVE the lenders their losses by doing the following along with a short refinance. We could place a silent 2nd mortgage on the home after the refinance to allow the former lender(s) to salvage their loss upon any sale of the property in the future. In this way, it is a win-win-win for both the homeowner, the lender and the economy.
So, I as I have been asking myself for years now, who came up with the SHORT SALE transaction idea and ignored the OBVIOUS benefits of the SHORT REFINANCE transaction? Homeowners have been told to be late on their mortgages to obtain loan modifications, which have failed miserably. The homeowner then becomes so far behind, even if they hear of a short refinance, it then is too late. Short refinances are not discussed in the media and the lenders do not speak about short refinances. WHY? Short refinances are available and the BEST option for everyone's sake.
Is it too late for short refinances to now be the norm? NO! It is never too late, but no one is listening. I have gone to our senator and approached other politicians. They all love the idea, but no one has made it their platform.
I will keep promoting this until someone does listen AND enacts this better solution to KEEP HOMEOWNERS IN THEIR HOMES AND START TO BRING THIS ECONOMY BACK!