How does right of rescission work in a refinance? Are the funds held for three days after closing, and then the prior mortgages paid off? Or is everything filed, paid off, and then reversed if the borrower exercies rescission?

The normal practice is to put everything on "hold" until the fourth business day. Then the lender makes reasonably sure none of the parties with rescission rights has exercised them. Finally, payoffs are delivered and discharges recorded.

Executing the payoffs at the closing and undoing them in the event of rescission could present an impossible task. As unlikely as rescission might be, I know of no lender that would advocate such a procedure.