by Calculated Risk on 10/24/2010 11:03:00 PM

Posted earlier:

Schedule for Week of Oct 24th

Summary for Week ending Oct 23rd

Michael Powell at the NY Times looks at short sales and foreclosures: Owners Seek to Sell at a Loss, but Bankers Push Foreclosure

The article offers two explanations for why lenders seem to prefer foreclosures: 1) short sale fraud, and 2) some incentives might favor foreclosure.

From Powell:

[F]inancial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.

Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.

In a more normal environment, servicers can "reap high fees" from foreclosures, but in the current environment there is a less of an incentive (since investors are reviewing all expenses closely). And mortgage insurance is a definite stumbling block to some short sales. But there is little evidence of the banks sitting on REOs to avoid taking losses (there just aren't that many REOs on their balance sheets) - so I think that point is incorrect.

When I've spoken to lenders / servicers, short sale fraud is always the first thing they mention. There are all kinds of possible frauds - from non-arms length transactions (selling to friends or relatives), off the record kickbacks to the owner, and "flopping", where the agent presents an offer to the bank from a partner - even though the agents has received higher offers, and then the partner flips the house after the short sale splitting the profits with the agent.

Even with all these problems, and the long waits for buyers, short sales have increased significantly this year.