Why Would a Lender Agree to a Short Sale?
Today's question is, why would a lender agree to doing a short sale?
We're going to take a slightly different approach today, and we're going to be discussing the benefits of doing a short sale from the lender's perspective.
The first key benefit for a lender is time, saving time.
So if a lender does a short sale, on average, that will take anywhere between five to six months. As we've discussed in previous videos, if a lender were to continue down the path of a foreclosure and go through all the proper channels, post all the requisite notices, etc., a foreclosure can take on average about a year from the date of the borrower missing their first payment. So that's time that the lender saves by agreeing to do a short sale.
Related to time, of course, is the time value of money.
The sooner the bank gets that money from the short sale, the sooner they accept the net proceeds from the short sale transaction, the sooner they can take those funds, invest them in something else, and realize the time value of money that we get from interest.
And moving on to point number two, the additional cost of doing a foreclosure.
There are a number of administrative costs and attorneys' fees associated with conducting a judicial or a non-judicial foreclosure, and these fees can add up rather quickly. By doing a short sale, the lender is actually avoiding incurring any of those additional costs associated with the foreclosure process.
Point number three, the settlement agreement with the Big Five banks.
In 2011, the Big Five reached a settlement agreement with the Attorney General's Office, agreeing to pay out billions of dollars for the foreclosure crisis mess that they helped get us into. And as part of that agreement, they could use forgiven debt on the back side of a short sale to act as almost a credit, to apply that forgiven debt as a credit to go towards that settlement amount. So it's really in their best interest to do a short sale, forgive that amount so that they can actually adhere to that settlement agreement reached in 2011.
And finally, point number four, the tax benefits.
Following a short sale, the lender will forgive a portion of the debt, essentially waiving its right to collect a deficiency balance, and that will be treated as cancellation of debt income for the borrower. From the lender's perspective, they can write that off. They can write off that portion of debt, take it as a loss, right, report that as a loss on the corporate taxes, and they can actually realize a tax benefit from doing so.
So these are all of the reasons from a lender's perspective why they would agree to do a short sale.