Why would a bank move forward with foreclosure on a short sale with a viable offer?

Question

I recently put an offer on a short sale, for the same amount the owner purchased the home for in 2003. He may have second liens that I am unaware of, but this much I know.
The bank got my offer scanned in and was in the process of assigning a negotiator. Why at this point in a short sale (which I understand banks started doing as a better alternative to foreclosure) with a viable offer on the table, would the bank move forward with a foreclosure instead of accepting the offer?
As I understand it, foreclosures, outside of the money lost on the property are timely and expensive in themselves. The bank actually has to "go to court" and so on. So it doesn't make sense to me, but perhaps there is an industry benefit?
This is so frustrating, I appreciate your feedback.

Answer 1

A bank is a big bureaucracy. People in one office may be doing one thing, while people somewhere else are completely unaware. Perhaps the people who filed for foreclosure did not know about the pending short sale.

Another issue is regulators getting involved. They may be threatening to seize the banks assets, and requiring the bank to foreclose on some houses which are behind in payments. Regulators are not looking at the broader picture, and do not care that you have a short sale offer before the bank. They are just looking to dot their "i"s and cross their "t"s. And you lose. It's stupid and unfair, but it is part of the business.

It is surely frustrating, but what you need to do is pick yourself up and try again.

Answer 2

A short sale can be very complex. In many cases the bank does not own the mortgage but it has been sold to investors and the bank is just a servicing agent or there is a second mortgage, HELOC, or junior liens from another lender or a creditor.



Even though the bank has given the approval to short sale the property, it had not got the approval of the investors or other junior lienholders at that time. Once it gets an offer that it thinks the investors will accept, it will then try to get the approval of the investors (there could be several or even hundreds). If any investor turns down the offer, the sale can not go forward.



In case there is a second mortgage or a HELOC and the bank owns the fist mortgage, the bank will have to convince the lenders of the second mortgage or the HELOC that the offer is in their best interest to approve the sale. This is usually very difficult since generally there isn't any proceeds to distribute to the second mortgage or HELOC lender. Therefore in order to convince the other lender, the bank will have to offer the other lender part of the proceeds to get approval for the short sale. If there are also other junior liens on the property, the bank will also have to deal with them in a similar way.



Finally if a foreclosure and then a resale will pay 100% of the first mortgage plus senior tax liens, the bank may not desire to continue with a short sale since it will likely cost the bank money.



Since a short sale is already on the market below market vale, it may no longer be beneficial to the bank if it has to pay out a lot more money to make the sale work.



Any number of the above could have given the bank a problem and decide to abandon any attempt at a short sale.

Answer 3

Alicia... what every one is saying is true... to a point... I flip short sales and thats the business I'm in so I follow this moving target...



In the last few months banks have not be accepting short sale offers... and the reason is a new tax accounting rule on the over the counter derivatives market. This derivatives market is basically the "investor" who is backing these loans that are in default.



This new tax accounting scheme is the reason why banks actually had a profitable 2nd qtr... this accoutning rule takes non performing assets (i say liability) to show a value. When you short sale that value becomes immdiate and the investor gets hit with an acutal loss... compared to the lender foreclosuing... and getting the actual loss when the property sells.... basically kicking the can down the road....



Hope that helps...



If you want to buy the house... then contact the asset manager... find out what the opening Bid the auction was... this will give you a bottom line... and just offer slightly below 5-10% and you'll get the property.



Jeff Coga

Answer 4

A classic case of the left hand not knowing what the right hand is doing. The asset management dept. may not even be in the same city as the legal dept.



So a fair analogy is: the asset management dept. in New York is selling the house, the lawyers in Atlanta or some other distant place is foreclosing, and the Vice President in charge sits at his desk in Chicago and gives himself a salary bonus because everything is going so smoothly.



Your realtor or attorney should contact the bank people who they have been dealing with, and have the bank people contact the legal dept. and stop the foreclosure.