Short sales are crucial to clearing the post-bubble housing market, but banks typically drag their heels. That's because approving a short sale means accepting - and accounting for - the fact that you're never going to collect what you're ostensibly owed.
In what may be another sign of an incipient recovery, Bloomberg reports that some banks are now embracing short sales in a big way: by paying large incentives to sellers to agree.
Bloomberg's Prashant Gopal writes:
And the story also suggests that the incentivized short sales, which aren't being publicly discussed and seem to come out of the blue as a "tap on the shoulder," may be a way to clear loans with underlying title problems, such the "robo-signed" documents that are a focus of the multistate litigation now in turbulent settlement talks:
But Bloomberg's report may also reflect the underlying economics of the housing bubble, especially a key point that everybody has been trying to sweep under the rug for years: Every bad mortgage was a two-sided transaction. If there wasn't outright fraud on one side or the other - and sometimes there was - today's underwater loan is like every other deal that looks foolish in hindsight.
Homeowners who want to stay in their homes and can afford payments would be much better off with direct principal write-downs, of course, rather than the after-the-fact variety entailed in a short sale. But both sides made bad bets, and the only way the market will clear is when both sides accept the consequences.