Is the Delay a Bureaucratic Logjam—Or Is Something Else Going On?

©Robert Irwin 2010

If you’ve attempted a short sale in the last two years, you’ve probably had a bad experience. Most REALTORS® report that it’s taken them five to seven months to get lender approval, if it ever comes. By then the buyer is frequently long gone, and there’s no deal to be made.

Why is it so hard to make a short sale (where the lender accepts a short payoff to facilitate the deal)? After all, it would seem to be to the advantage of the lender to get rid of a non-performing mortgage. Clear the books and move forward makes sense, doesn’t it?

Maybe. And then again, maybe not.

Many agents point to simple confusion on the part of lenders as part of the problem. Their foreclosure departments were set up to handle an occasional default, not tens of thousands of them.

That certainly was the case back in 2007. But recently Wells Fargo reportedly hired more than 7,000 personnel to help with foreclosures (and short sales). Bank of America, Chase and other lenders have similarly indicated that they have ramped up their staffs to handle the tsunami of foreclosures. And surely two years of the Great Recession are long enough for major financial institutions to get their acts together.

Of course, it’s been estimated that close to 50% of the mortgages that are facing foreclosure are owned by Fannie Mae and Freddie Mac, and local lenders are nothing more than servicers.

Even so, the reluctance of all lenders to accept short sales seems more than simply a bureaucratic logjam. Is there something else going on?

As I said, maybe. Consider: When a lender accepts a short payoff, it’s probably losing money. (In some cases that may not be so, as we’ll see.) And nobody wants to be responsible for taking a loss. So, there’s not a whole lot of incentive from personnel to accept that short sale.

Additionally, until the short sale (or foreclosure) actually takes place, the lender is holding that mortgage on its books at full value. Yes, it may be non-performing, but it’s still a major asset. The lender doesn’t mark it down to market until it forecloses or short sales it. Only then does the real loss appear. (In truth, if all the lenders in the country were to mark their mortgages to market, most of them would be insolvent!)

So to protect their asset sheets, many lenders simply prefer to sit on mortgages, not foreclosing, not accepting short payoffs. It’s like the “lost decade” that Japan experienced in the 1990s when most of its banks were insolvent, but continued functioning and “making money.”

Yet, there’s another reason that some lenders don’t want a short sale. They actually may be holding mortgages they received from another lender, which was put out of business by the FDIC. If they have to foreclose on these mortgages at a loss, the FDIC may make up that loss. What then is their incentive to sell for a short payoff? These lenders may not be amenable to a short sale no matter how hard you try.

Does all of this mean that getting to “yes” on a short sale is hopeless?

No, not at all. It does mean, however, that as an agent you have to know what you’re up against, when you can win and when to cut your losses and move on. (In some cases, nothing you do will convince a lender to act. It has other motives and intentions.)

However, if you can show many lenders that accepting a short sale saves them money (as opposed to foreclosure), they may act and very quickly. Here are three steps to take to get to “yes” on a short sale:

  1. Don’t assume the lender is confused, stressed and lost in bureaucracy. Assume the lender knows exactly what it’s doing and what it wants. What it wants, however, may not be what you want.
  2. Realize that it’s unlikely you’ll ever find out the true motivation of the lender. Rather, learn by its actions. If you correctly prepare the right documents (described below), you should have an answer within a few weeks. If not, it’s probably not worth waiting months – move on.
  3. Be sure you’re talking to the right department—usually the loss mitigation department/officer. You must find out exactly which forms they want. (At this stage of the game, every lender seems to want different forms. The government is working to standardize this.) Then correctly prepare and submit the forms.

There are many forms you’ll need. The big three are:

  • The proposal letter, which explains your short sale and why and how it benefits the lender
  • The net sheet (or HUD-1), which should show the lender why it will net more from your short sale than a foreclosure
  • The hardship letter, which must convince the lender that the borrower will never get current on the mortgage


The federal government is now offering incentives for doing short sales. For one, the borrower can get $1,500 instead of nothing. Of course, the borrower/seller is not usually the problem.

For another, the lender of the first mortgage can get $1,000 for completing a short sale. Of course, in the grand scheme of things that’s a drop in the bucket. (On a $110,000 mortgage that’s less than 1 percent.)

But the real plus may be that the government is also offering $1,000 to holders of seconds. Getting a second (which will otherwise get nothing) to release is often what gums up the short sale. This gives that holder an incentive to act.