When a bank holds a mortgage that is underwater, that is the amount of the mortgage is greater than the value of the home, and the owners have stopped paying the bank generally has two choices. The first one is to foreclosure, in which case the bank takes ownership of the house, throws out the occupants and tries to sell it on the open market to recoup the mortgage amount.
This rarely does any good for anybody. The bank has to maintain the house, pay the taxes, market the house and assume all of the problems of ownership, including repairs and maintenance. Foreclosure for a bank usually leads to a huge loss. The occupants, or former occupants that is, are now without a home.
A second option is for the bank to accept a short sale, a sale where the proceeds are less than the amount of the mortgage. This is the far better solution for the bank, as their recovery is typically far more than what they would get had they foreclosed. So what have banks been usually doing? Foreclosing. Why? Because they are stupid, or because they don’t know any better, or because they mistakenly believe they can make more money by foreclosing (they can’t) or because they just enjoy throwing people out on the street. Take your pick
But banks are apparently learning the basic economics, and in California at least short sales are now more prevalent than foreclosures.
In recent months, short sales — in which banks allow homeowners to sell for less than they owe — have surpassed sales of foreclosed homes in California for the first time since the start of the housing crash in 2007, according to real estate research firm DataQuick. The transactions now represent about a quarter of the market, a surge driven by rising home prices, government crackdowns on foreclosures and banks' increasing capacity to process the deals.
Wow, so banks can learn. Yes it has taken them half a decade, but hey, remember who is in charge here. That’s right, all those boys and girls who sat in the back of the class and finished in the back of their class. So despite how lacking in smarts they were then, maybe they have picked up some now.