Why your bank won’t even talk about a short sale.
Posted on Oct 29 2010 at 02:41:30 PM in Real Estate
So why is your bank so resistant to accepting a short sale? The bank will tell you that there are many reasons. The main reason: your bank will have to immediately write down the value of the property to the amount the house sold for in the short sale. Banks do not want to realize these write downs on their balance sheets.
You have seen the story over and over. Homeowner find someone to purchase their home at $5,000-$10,000 less than what is owed on the mortgage yet the banks will not even talk about completing the short sale. Months later the bank foreclosure on the same house costing the banks $25,000 - $50,000 to complete the foreclosure. The house sits vacant and usually loses value due to lack of everyday maintenance.
To you and me this seems like a stupid business decision for all parties involved. So why does the bank do this? Because in a foreclosure the bank does not have to write down the value of the property until it is sold. If the bank just sits on the property, they get to keep it on their books at your original balance until they complete a sale. That is also why banks are sitting on such a large amount of foreclosed properties right now. If they sell the properties they must realize the losses.
We have already seen by the mortgage crisis that bankers are definitely not smart business people. If they were, they would not have made so many un-collectable loans. So now these same “not smart” people are deciding whether to accept a short sales on a property. Proving the “not smart” adage again, banks usually refuse.
Banks are using this tool to manipulate their earnings and their balance sheets, to ensure financial metrics are met giving the bankers the largest bonus possible. The fact of the matter is that the banks are using the dreams of American’s and the pocket books of taxpaypers to play accounting games with their finances. Sadder than this, the SEC made it generally accepted accounting principles so all banks value their foreclosures and mortgages this way and auditors only ensure that the banks meet the guidelines. If a banks balance sheet can still be incredibly over valued due to accounting rules, what other bubbles are out there that we don’t know about. Scary thought.
You want to see real transparency in financial accounting? The banks should all have to write down their assets specifically housing assets to net realizable value. The banks should only value their housing inventory and foreclosure inventory as the lowest estimated price they will actually receive if the property is sold, plain and simple.