BANKS’ INCENTIVES TO SELL SHORT CAN BE A LITTLE DREAMY
Understanding a bank’s financial motivations will help buyer’s grasp why short sales seem to take so LONG and why often the banks seem to be operating contrary to market conditions. Just because a property is a short sale does not always mean it will sell at or below market value states an article by Kim Bregman.
Sometimes short sales bring more cash than foreclosures, and vice-versa.
Which one it is depends on a host of factors, not the least of which is whether a lender has an agreement with the Federal Deposit Insurance Corporation for reimbursement of most losses on a bad loan like those sold short.
Multiple liens on a house and fat home-equity lines of credit that must be dealt with first are easy explanations for why a short sale languishes. Another is that lenders cases each year are now overwhelmed with hundreds or more short sale offers in a month and are significantly understaffed to handle the demand.
Then there are the complexities of the post-boom world: loans that have been bundled with hundreds of others, then securitized and sold to an investor, and scores of banks on the verge of insolvency that do not want to account for losses on a short sale. Even with those hurdles, there are short sales that can take 90 days or less from offer to consummation; but not many.
Simply put, the decision an individual lender or investor group makes — even if that is not to make a decision — is laden with a convoluted mix of what-ifs, if-thens, no-ways and sure things.
Oftentimes the banks are delaying until they can take the property through the foreclosure process.
A bank can sell the property for significantly less in a foreclosure sale that it would have if they had accepted the short sale process, BUT from the bank’s financial perspective they look to the interest payments they received from the Seller before they defaulted, the payout from the private mortgage insurer, and the proceeds of the foreclosure sale. Often the bank is not really losing much and sometimes can actually make money on these deals so they have little incentive to take a short sale offer.
