Short Refinance For Homeowners?

23 Nov Short Refinance For Homeowners?

Short home loan refinancing is not a new concept. Unfortunately, due to tightened credit for sub-prime borrowers, it has not been much of a factor in dealing with the current home foreclosure crisis.

However, short refinancing may soon become a realistic option for even those homeowners with challenged credit. Despite possible tax consequences from debt cancellation, this may become an increasingly popular loan modification tool for homeowners. Leave it to American ingenuity, hard work, the profit motive, and government subsidy to make it happen.

Short sale has long been a popular resolution for overburdened homeowners unable to make payments on mortgage loans. As values continue to decline, with many properties this is the only avenue for voluntary sale.

A short sale requires that a lender or lenders holding debts the value of the home take less than full payment in exchange for release of their secured interest. On the principle that voluntary sale generally brings more money than foreclosure, lenders have been increasingly cooperative and have even suggested short sale as an alternative to borrowers when home loans have gone into default.

Short refinance is the same as short sale except that the existing lender is paid off with a new loan instead of sale proceeds.Many homeowners have tried to convince their lenders to allow them to refinance and pay less than the amount owed on their original loan. In this way they could keep their homes and avoid foreclosure.

The Obama administration HARP program provides for that type of transaction and includes a financial inducement for the participants. Unfortunately, the HARP program, like all other home retention programs to date, is voluntary. It is also limited to certain types of government guaranteed loans. Despite the obvious appeal to homeowners, short refinance has not usually been available to save homes from foreclosure.

There are obvious difficulties with the concept of short refinance. Primary among them is the lack of lenders willing to provide financing to borrowers who have defaulted or threaten to default on their existing loans. The banks holding these loans are often resistant to voluntary transactions in which they are guaranteed to lose money.

However, a new program seems to be making short refinance available to increasing numbers of homeowners. Investors are buying up large blocks of loan at steep discounts and passing on part of the discount to the borrower if they refinance and pay off the loan.

Bank failures and the government takeovers that follow failure have reached the highest level since the great depression. With all of these banks to liquidate, government regulators are selling off large portfolios of home loans to investors, often at prices that are less than half of the loan aggregate face value. The investors can facilitate short sales, short refinances and other transactions for less than face value and still make a profit.

While the practice of short refinance has recently been criticized by a New York Times article as a government giveaway, it may be the most efficient solution to a truly nettlesome problem.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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