Over the past three to four years the housing boom and the refinance boom saw hundreds of thousands of American homeowners and investors jumping into homes they could ill afford at the time and now that two year ARM and three year ARM loans are starting to adjust upwards these homeowners are feeling more than a little pinch. One time aspiring homeowners and investors who jumped in with ARM or IO (Adjustable Rate Mortgages or Interest Only mortgages) are now completely upside down in properties that are negative cash flowing and in many areas of the country in a price correction downswing leaving them as far as 30% or more negative from debt to value.
For example in Port St. Lucie, Florida, there are literally hundreds of homes with loan payoffs in the 300k to 400k range with actual current values in the 250k to 350k range. If a lender chose to foreclose on one of these properties they would never sell it at the payoff value so would have to take a loss on the market. The down side to the lender is that the lender now has a black eye because it made a loan on which it later had to foreclose.
A little known fact to most people, at least outside of the industry, is that the lender suffers from foreclosing on homes in more ways than one. To fully understand how the lender suffers you need to know what happens on the lender "side of the fence".
Firstly, many lenders are not "Direct Mortgage Lenders" (DML). Instead they make loans from a warehouse line of credit. In order to keep that warehouse line free and clear so they can make more loans they have to sell those loans on the secondary market as quickly as possible. Secondary market buyers include all types of people and companies including DML companies who have enough assets to portfolio (hold) the loans they purchase from other lenders (Countrywide, NovaStar). Other secondary market buyers may include the retirement fund for your local firefighter's union or even the unassuming fellow down the street who drives a 1992 Volvo but holds $2,500,000 worth of Mortgage Backed Securities (MBS). You can even buy a mortgage note if you have the cash to do so.
Mortgage Lenders are rated "on the street" by secondary buyers. A lender who continually sells loans which perform well has a higher rating than a lender who sells loans which do not perform well. Lenders who originate 
loans (it's still the originating lender even if a broker actually originated the loan and sent it to the lender) which go into early payment default or the dreaded first payment default lose their rating and cannot sell their loans as readily as they could before the default.
Lenders who sell on the secondary market like my Novation depend on what is called lender yield to earn an income. If that lender has a high rating and has originated only well performing loans they can price their loans for a higher yield than a lender who has a lower rating. In fact some lenders submit so many poorly performing loans that they can no longer sell for a profit and must close their doors.
Lenders need to sell the loans with a high enough yield to cover the cost of doing the loan which includes any commission or "Yield Spread Premium" (YSP) paid to the broker and enough to continue doing business so sales of 105 or 106 or even higher are commonplace. Sales of 103 or less could be harmful to the lender and obviously a sale of 101 or lower would eventually put them out of business. Those numbers are a percentage of the loan amount. In other words a loan of $100,000 needs to be sold on the secondary market for at least $105,000 (105) to make sense. (It is beyond the scope of this posting to explain why that can be done but just remember that interest is front loaded on mortgage loans and it should make sense to you.)
Having written all that I can now demonstrate why Short Sales make good sense for lenders. A lender will lose money on a short sale to keep from having a foreclosure on their books so their rating doesn't go down as sharply as it would for a foreclosure. The lender takes the loss on a short sale; the investor takes the loss and downgrades the lender on a foreclosure. (I won't take the time to talk about the caveats of other events or procedures in this article so if you are familiar with lending and secondary marketing I know you are think, "Right, but Ken; what if .....?")
The key to successful short sale negotiation comes in having access to or business partners with access to AVM (the type used by lenders), contact information at the lender for the appropriate department or even person, knowing the necessary timing of when to start a SS negotiation (i.e. Do you have an NOD? What is the payback power of the home owner? etc.)
If you don't know everything you can about Short Sales next summer is too late to learn because your competitors will beat you to the punch. Already today I've had two calls from client's needing to Short Sale. There is a set of rules and procedures necessary to negotiate a short sale. Look around and see what kind of information you can find. Start here and do some searching on your own.
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Happy helping people!
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