Why Would A Bank Take Less Than What Is Owed On A Property?

Pick up any newspaper in any city today and you will likely find some mention of the current foreclosure debacle. Its influence has been far-reaching and in some instances devastating economically. Living in Southwest Florida I have had the dubious pleasure of experiencing the fallout firsthand. On my street alone there are two homes in foreclosure, with both rapidly approaching their auction dates.

With this forecast in mind it only makes sense that more and more banks and lenders are willing to accept short sale offers. In this article I will cover what banks and lenders stand to gain and lose by accepting a short sale offer.

What Do Banks and Lenders Have To Gain?

The simple answer is money. Cold, hard cash in hand is a powerful persuader for anyone. Lending institutions are no different than you or I. Cash flow is the name of the game and the more money they have to invest the more they stand to make. By accepting a short sale the lender knows they will at least recover some part of their original investment. Another consideration for them are the loses they write off give them a substantial tax break, which is no small matter to companies generating billions each year.

What Do They Stand To Lose?

Again the answer is money. Writing off 20-30 percent of a mortgage hurts the bottom line regardless of the tax implications. Another way to put this into perspective is to extrapolate out what the overall loss is on the tens of thousands of defaulted loans.

By using the U.S. national average purchase price of $264,540 for a single-family home in October 2004 (according to figures released by the Federal Housing Finance Board) as an example we can do simple math to see the enormity of the dollar amounts that lenders were forced to write off. In 2007 the average short sale went for 80% of the original loan amount. Using the above average purchase price and applying simple math you come up with loss of $52,908 per loan. Now multiple those numbers by ten thousand for example and you start to get some idea of the immenseness of the dollar amounts involved.

Again these are average numbers used to illustrate the problem. As the national media has so ably reported during the past several years the actual numbers of defaulted loans and foreclosure filings have run far into the hundreds of thousands.

Don't forget also that most of these companies are publically owned and stockholders start to get tense when the company they bought stock in starts showing record loses. Many shareholders may panic and start selling their shares creating the potentially dangerous situation where a company cannot sustain such loses and collapses upon itself. This scenario has come closer to playing itself out than you might think.

Conclusion

It's hard to say if there really is a clear-cut winner or loser for those involved in a short sale. The borrower is able to stop foreclosure but their credit takes a severe hit. The lender has to absorb the loss of tens of thousands of dollars while being able at the same time to cut their losses and increase their all important cash flow.