To approve the Short Sale or Foreclose… that is the question most lenders are facing right now with their default borrowers. There is a common myth which I hear more and more which states that lenders actually make more money doing a foreclosure than a short sale and therefore they would opt to foreclose. In most cases that is not true, but rather they are going to opt for the route that gives them the highest net amount possible with the lowest holding time possible. Keep in mind banks are in the business of lending money, not owning properties. So the more inventory the bank has on their books, the more likely that is going to limit the amount of loans they can make. With the costs holding and marketing the property only going up, many lenders are finding that they can save 10% or more on their costs by accepting a short sale vs foreclosing. Costs of holding properties can include property taxes, HOA dues, utility costs, opportunity cost of capital, and more. Those costs all increase over time the longer the bank has the property. These costs impact what the banks call “loss severity”, and are expected to increase in 2011. Thus many experts believe services and investors will be more likely to opt for a short sale in the next couple years. That is great for homeowners who must sell but owe more than the home value.
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