Does Any One Know Why The Banks Prefer Foreclosures Over Short Sales?

There is a video online where two guys are explaining in a powerpoint presentation how between government guarantees and mortgage insurance payouts the banks actually MAKE a substantial profit on foreclosures.  

Saying "banks" prefer foreclosures to short sales is a little to all inclusive since not all banks are the same. Some banks may prefer a foreclosure to a short sale due to timing.  In a short sale they may not own title to the property and be at the mercy of that title holder.  That slows them down.  If their performing to non-performing mortgage ratio hits a certain point they loose their ability to have Fannie and Freddie provide them greater loan power. At that point they are going to move the fastest way they can...if that is foreclosure so be it. Banks care little if at all for the people, they care about their business and so they will act in accordance with the business plan is spite of any sanity you may be able to add to this situation.  It is mystifying isn't it, but it has always been true, follow the money.

I think it depends on the property, and sometimes the owner too.  There are mortgage insurance and government guarantees attached to some property that makes it more profitable for banks to foreclose on some properties.  If the owner has assets that can be accessed through a deficiency judgment, it's more likely that there will be no short sale. 

Thanks for the great explanations!  This now makes more sense to me.  I was wondering how much the mortgage insurance plyed in to the foreclosure picture.

In many cases there is an advantage to forclosure over short sales for banks but it is a case by case basis.

Agents who don't know how to properly navigate the process contribute to the high rate of short sale failure. More than half of short sales do not close. Yet many agents have success ratios over 90%.

It's math. If a transaction is more profitable to the bank as a short sale vs. a foreclosure, then the bank will do the deal. But it's critical that the agent get that message into the right person's hands at the bank -- someone who has the authority to make the decision, someone whose paycheck includes incentives for return on investment.

That means getting past the initial "No." And too few agents are willing or able to make it over that obstacle.

I believe that every short sale can get approval but not every seller will approve of the terms, price and conditions.

That being said - there are different reasons for those terms and conditions - was it purchase money, was there a strong hardship, was there PMI?  PMI may be a leading factor here for junior lienholders (mostly) to get greedy.

The long and the short of it is that there are many "behind the scenes" factors in play and we (as a seller's agent) cannot know most of these factors heading in to a short sale.  Many will be discovered as the process continues in each particular case but some things we will never know. 

All you can do is apply all of your skill and effort to each individual case combined with the knowledge that you are able to apply.

It really is a complicated issue in the end.

Comment #1 nailed it.

http://cawholesaledeals.com/blog/793/the-indymac-fdic-one-west-bank-short-sale-scandal/

The simple answer is these banks are in the back pockets of many politicians who have promised that they will get all the money they are losing in tax breaks and in some cases actually cash if they have any loses due to foreclosure, where they won't if they do a short sale.

http://www.larryhotz.com/fdic-pays-bank-to-foreclose/

http://www.youtube.com/watch?v=kdJBNCGEVso

here are two that I have seen

it's such a simple concept. . .the second mortgage holder and potential buyer are just thorns in the side that the banks don't have to deal with on a foreclosure.    The bank is concerned with bottom line.    I just don't see short sales being worth it for the buyer under these circumstances - they direct the listing agents to list them at below market prices and then refuse to accept full price - it's a game.

I can only speak from my experience here in metro-Phoenix, hard-hit by the real estate crisis.  Our numbers show that short sales, in general, are in better condition and, most likely resemble a traditional sale in terms of condition and pride of ownership, at a tremendous value.  We are working our way out of the time when it took 6 month for approvals and see approval times dropping dramatically; many in less than thirty days with and without second liens- many second lien holders able to make assessments and commitments in ten days or less. 

Bottom line is that lenders realize they will lose anywhere from 15-25% more if they foreclose and then turn around and sell as an REO. A small percentage of our foreclosures sell at trustee sale and most revert back to the lenders. The vacant properties deteriorate, while costs of sale increases through ongoing maintenance, property taxes , utilities. If they can have a seller in the property, maintaining it and paying utilities they are definitely ahead.  Short sales will be a solution to arresting declining values and helping to stabilize our markets at levels above foreclosure. 

Short sales are now representing 25% of metro Phoenix closings in the month of August and appear to be rising based on under-contract and sale-pending numbers.