Why Don't Lenders Care About Doing Short Sales?

It is an enormous frustration to investors doing short sales that the lenders take months to make a decision and just don't seem to care. The homeowner stuck in the middle gets frustrated because he doesn't know how soon he will be required to move or worse, be evicted from his former home. In fact, the business of short sales by lenders is a gigantic part of their business and is absolutely necessary to keep their inventory of homes (REO's) as low as possible.

Despite the benefit to the lender and to the investor, the investor-buyer is often treated as a "bottom feeder" and with minimal respect. Why should the lender treat investors any differently? Common sense, which is not all so common, would say that getting rid of a headache is better than suffering. However, if lenders agreed quickly to short sale offers, they would be putting their portfolio at risk by not doing good and proper due diligence with regard to the real value of the property. In the old days, an investor could walk into a local bank office and ask if they had an REO's. The clerks or tellers would send them to an officer who would have a few properties that were For Sale by the bank. These days are gone in 99% of the country. To avoid favoritism and possible fraud, these transactions are centralized in loss mitigation facilities throughout the country. All foreclosure cases are handled by these highly trained professionals that are taught how to handle investors.

Handling investors is very simple. The investors who get short sales done quickly and efficiently are offering way too much money, usually 80+% of the mortgage amount due. Lenders will take this 20% discount all day long. The real short sale specialists are the ones who work diligently and get discounts of 30% to 50% off. To get this amount the lender has to cool his heals and have the property listed on the MLS® to make certain the property can't be sold for a more reasonable price.

Investors target the deficiencies in the property and any weaknesses the lender will have to correct or pay for until the property is sold through a realtor. If the realtor lists the property too high, there will be no offers. If he lists it too low, he will have offers but the buyer will have the low offering price on the MLS® to contend with when he rehabs and re-sells it to retail buyer, resulting in some buyers not being able to get financing.

The loss mitigation reps have hundreds of cases assigned to them and are paid on performance. Yes, the lender knows how much he is willing to discount each and every mortgage that comes into loss mitigation. So despite the best efforts of the investor to de-value the property, the loss mitigation rep already knows the amount he can allow the mortgage to be discounted. The "loss mit rep" knows because he has access to real estate agents' price opinions (BPO's), real estate agents' comparative market analysis (CMA's) and appraisals that all indicate the fair market value at a specific time.

The public records are reviewed to see what other issues the lender may face. Finally, a "kick-out" price is determined by a supervisor and the loss mit rep is given a monetary incentive to get anything higher for the mortgage. What happens is the loss mit rep is actually bidding against himself by allowing the investor too low a price. So the incentive is to control the investor by driving him crazy by not answering calls, and holding off as long as possible. If the short sale isn't completed it is not a demerit against the loss mit rep.

The system of loss mitigation is inherently flawed by the way lenders compensate their employees and the number of cases (250+) each rep is required to handle. The cases that get the attention are the ones with the highest offers or lowest discounts because the loss mit rep gets a higher compensation. Unfortunately, this means that viable properties are left to sit and decay that could have been sold quickly otherwise and often for more money. So the lenders may care about getting properties off their books, but their loss mitigation system is flawed in the favor of the people who should be interested in doing the best job for the lender, not the homeowner or the investor.