The Short Refinance

I want to take a moment to detail, what I believe, is the next "boom" in the industry.

In 2003 - 2004, we had the refinance boom, where everyone was taking advantage of the lowest interest rates seen in 30 years, refinancing into 5/1 ARMs at 3.875% or 30 year fixeds at 5.125%.

Then, in 2005 - 2006, we had the purchase boom, where everyone was selling their home, and buying the new one. House prices screamed 50%, doubling in many cases. Homeowners took out equity in record rates, going to 100% loan to value, and even 125% loan to value, as mortgage lenders like Countrywide and Irwin Home Equity saw no end of the increasing appreciation in sight.

Now, the market has turned. Appreciation becomes depreciation, and the S&P finds itself stating that prices will likely decrease 20% across the board. Some believe prices will go back to their 2004 or 2005 levels, a likely scenario in many places. Homeowners are now faced owing more than their house is worth, and even if they had enough equity to sell in the first place (10% rule of thumb) due to increased supply, homes aren't even selling at their truly appraised value. Many are simply walking away from their homes, figuring that they're saving 50 - 200K in many places (CA, AZ, FL). Others have their subprime mortgage going up to 8% or even 9% in some cases, and find that they can't refinance due to constricting lender guidelines. Credit is simply much, much harder to get than it was even 6 months ago, much more so when they bought their home 2 - 3 years ago.

But, what are homeowners to do?

This is where the short refinance comes in.

There are some out there that know how to negotiate the principal balance of a mortgage down. Banks oftentimes accept this because it costs less than a foreclosure (normally a 40% loss). Typically, these short refinances (akin to short sales) cost the bank 20%, thus saving them 20% in the case of a foreclosure.

What happens is that the homeowner proposes that the bank reduce the amount of the overall liens by 10 - 20%, in some cases 30% where advantageous. Working with a third party negotiator is often best, because it adds a sense of objectivity and professionalism in the transaction. I, myself, act as a negotiator and charge a $500 upfront fee for each property negotiated, regardless of outcome.

Many people do not believe that this is even possible. This is likely because it's such a new concept, and not many people have heard about it. Well, if you'd have told me that your house values would double from 2003 - 2006, I would've thought that was crazy....so I guess it goes both ways. The fact that there is even bailout legislation in the House currently underscores the fact that not only is this possible, but plausible, and is even being done as I write.

Ultimately, it's all about negotiating. If you're the bank, looking to lose 40% due to a possible foreclosure, losing 20% all of a sudden doesn't look to bad.