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.
Investopedia Says:
Foreclosure is an expensive solution for a lender for loans in default; not only does the lender not receive any payments for up to a year, but it may lose out on fees associated with the procedure. A short refinance is just one of several alternatives that might be more cost effective for the lender. It also allows the borrower to keep his or her home. Other potential solutions are entering into a forbearance agreement or a deed in lieu of foreclosure.
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