Mortgage Newsletter

Short Refinance

The refinancing of a mortgage by a lender for a borrower currently in default on his or her payments. This is done to avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the difference is typically forgiven by the lender. A lender might do this because it is more cost effective than foreclosure proceedings.

Short Refinancing is the refinancing of a mortgage by a lender for a borrower typicallyin default on thier payments. Short Refi's are typically done to avoid foreclosure.The goal of a short refinance is for the new new loan amount to be less than the existing outstanding loan amount andthe differenceis typicallyforgiven by the lender. A lender might do this because it is more cost effective than foreclosure proceedings. A short Refinance Differs from a straight refinance in that a Short refinance is for less than the full amount, where a straight mortgage refinance addresses the interest rates or the length of the mortgage.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act was passed by the United States Congress on September 25, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. However, this act extends such relief for only three years.

This legislation coupled with the Community Reinvestment Act has been blamed for causing the 2008 collapse of the United States banking sector.

Normally in US law when a lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.

However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences -- rental properties are ineligible for relief -- so consultation with a tax advisor and a Florida Real Estate Attorney specializing in short sales is necessary to ensure that a borrower qualifies.

More recent legislation provides for a specialized type of refinancing option, available for mortgages made after 2006, for owner-occupied homes. Under this program a debtor provides information similar to that necessary for a short-sale but rather than selling the house to a third-party an FHA guaranteed loan at a fixed-rate is available if the original lender is willing to write-off all but 85-percent of outstanding of the debtor's obligations (including principal, interest, late-fees, prepayment penalties, and all other fees).

FHA Backed Refinance Packages

FHA-backed refinance packages are available beginning October, 2008, and carry a fee equal to 1.5% of the value of the house. Debtors who exercise this option must sacrifice 50-100 percent of equity that builds in a house, and may not participate in home equity loan programs. This program is only available to owner-occupied residences. This program requires consent from a lender: consent is not automatic and may be freely withheld, though withholding consent can result in a foreclosure with adverse financial results.

"When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes. So I'm working with members of both parties to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt."

â”€ President George W. Bush, 9/1/07

President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007,. It is intended to help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.

* This Act intends to increase the incentive for borrowers and lenders to work together to refinance loans and allow American families to secure lower mortgage payments without facing higher taxes.

When is a Short Refinance Appropriate?

Owners of investment and primary residences that are able to obtain "acceptable" financing (conventional or private) on property that is "upside down" fairly significantly.