Banks Are Preferring Foreclosures to Short Sales

Posted on May 29, 2009
Filed Under Foreclosure Homes | Leave a Comment

Questions are being raised as to why banks prefer foreclosures to short sales although the percentage of loss for banks in short sales is 19% whereas in foreclosures it is much higher at 40%. The common experience is that even if the homeowners manage to secure a buyer, in these difficult days, the banks take so long to give an answer the buyer goes away by that time.

The answer lies in the system of securitization of mortgages. The mortgages have been sliced and sold to various investors who are arranged in a pecking order. When a sale is arranged the first investors get the lion’s share while the junior investors are often left with nothing at all. These juniors then file cases and complicate matters.

Senator Barney Frank (Democrat) who is also chairperson of Financial Services Committee commented, “It’s disappointing. I’ve heard that and I’ve been trying to press the banks not to do that.” Without reforming bankruptcy laws there is nothing the government can do within the framework of the system but plead with the lenders. Speaking to Huffington Post Frank said, “In the absence of bankruptcy [legislation], you’re talking about contracts that we cannot abrogate," he told the Huffington Post. "That’s why bankruptcy was so important.”

But the Congress refused to comply. The banking lobby had the last word. When asked if there was a second chance for the Congress to return it Frank said, “Excuse me, what planet were you on last week? The vote was 45 to 51. Why would you ask that? Do I think there’s likelihood we could overturn 45-51? No.”

Senator Dick Durbin (Democrat) is far from confident and said, “The purpose of the debate last week was to try to create some impetus for the banks to start renegotiating these mortgages in a positive way and the industry fought it. I think many of the banks have not operated in good faith when it comes to this mortgage foreclosure issue.”

The biggest losers in the failure of the bankruptcy bill are the homeowners. Realtors also are beginning to lose hefty amounts as the commissions are drying up. The group is powerful and may be a counterweight to the banking lobby. The National Association of Realtors is crying for rules to be changed. Their spokeswoman Mary Trupo said, “We are advocating measures that would help streamline the process when using FHA, Fannie or Freddie. We are hoping that new process and regulations are put in place.”

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