There’s a ton of reasons; almost none of them make sense. But for about 2-3 years I’ve been adding this opinion to my list of reasons banks are slow to OK short sales.
Mind you, this is my opinion. I have nothing to back up this idea other than a rudimentary understanding of Accounting 101:
- accounts receivable = assets
- accounts payable = liabilities
I believe that one of the many reasons banks are so slow to approve short sales is that while they stall, they can book the mortgage payments as an accounts receivable item, whether the homeowner is actually making the payments or not. The second the bank OKs a short sale, they have to book a giant loss. Again, only my opinion, but it passes the common sense test with everybody I’ve mentioned it to.
Now, a story at Forbes magazine backs me up, sort of. (hat tip to Mish’s Global Economic Analysis blog for the story link)
Robert Lenzner at Forbes writes US Banks Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages
[Due to loose accounting rules, banks are] allowed to accrue interest on non-performing mortgages” until the actual foreclosure takes place, which on average takes about 16 months.
All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.
This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.
Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.
Astounding! The extent to which our entire financial system is built on castles in the air is staggering. Banks make money because they say they do. Our dollar bills have value because we all agree they do.
I’m gonna go sit down now. My head hurts.