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So it begs the question, “Why are banks holding out for such high offers
when they currently have an offer to negotiate with?” The answer is
simple – banks have insurance. The borrower has typically paid either
private mortgage insurance or it is insured through Fannie/Freddie. So
rather than accept the lower offer price, they would rather go through
the foreclosure process and then collect the insurance on the home.

We are seeing this happen more and more as lenders get appraisals that are
really much higher than market. There is little incentive for the bank
to accept the true market value when they can collect the insurance
premium for closer to the full value of the loan.

The harder part to all of this is that it really just hurts the borrower.
Rather than be frank with the borrower and tell them to do a deed in lieu
or accept the foreclosure, they are dragging their feet and
providing a false hope that they might get it resolved with less impact.
In reality, the banks prefer to foreclose, take the insurance money
and get the non-performing asset off their balance sheet.

This is why you have seen an increase in the cost of mortgage insurance.
More and more lenders are cashing in on their insurance policies and then the
cost gets passed through to new borrowers to make up for the losses on
previous bad loans.

So, if you are working with a client who is looking to buy a short sale
and are wondering why the bank isn’t accepting your market value offer,
now you know!