In cost-reduction refinances, lenders allow you to include the settlement costs in the new loan balance. This may be because borrowers reduce their equity, or because their need for funds reflects financial distress. Whatever the reason, lenders typically charge higher interest rates or points to cover the extra risk. He does this by padding the settlement costs and paying your friend the difference. The broker deals with a stable of lenders, so he can move the loan from one lender to another without raising suspicions.
Some borrowers do legitimately pay off loans within six months.
Your friend is bound to stop refinancing at some point, perhaps when his equity has been entirely depleted. But your borrower friend is also getting conned into paying an exorbitant price for a small loan. Each time he refinances, he increases the debt on his house by the amount of the money he puts in his pocket plus the real settlement costs and the broker's fee. Your foolish friend would save money if he simply obtained a home equity loan.