Banks and servicers were designed to collect mortgage payments or foreclose. When the housing crisis hit in 2008, these institutions were not equipped to handle the deluge of borrower requests for loan modifications, forbearance plans, short sales, sale-leaseback plans, and deed-in-lieu of foreclosure transfers. Prior to the crisis, lenders could simply foreclose and recoup their investment because of the ever-increasing housing values.
The banks and servicers offered few alternatives to foreclosure, lost paperwork, took months or years to approve short sales, and even foreclosed on borrowers after offering them alternatives to foreclosure. There were even stories about lenders who foreclosed on homes that had no mortgages.
One glaring problem for struggling homeowners was that almost all the lenders had a policy whereby they would only consider someone for a short sale if they were delinquent on their payments. Many homeowners were trying to do the responsible thing by paying their mortgage and sacrificing on other expenditures. Many people who needed a short sale to sell their house ended up not even being considered for one. People were faced with the decision of deliberately defaulting on their mortgage just to be considered for a short sale. The policies of the lenders seemed bizarre and illogical to many struggling borrowers.
Another problem for people seeking a short sale was that the lenders would only make a decision on whether to approve a short sale if there was an offer from a buyer. The lender would give no communication or suggestion prior to the submission of an offer on what might be considered acceptable. Real estate agents and sellers were not sure of what list price to use. Once an offer would finally come in, the lenders would take so long to make a decision that the buyer would walk away, thus wasting many months of effort. Real estate agents and sellers would ask the lenders to provide some guidance on what would be an acceptable price. Yet in the past, banks would generally not grant a short sale pre-approval.
A major challenge for the banks (that they helped to create) was that many struggling homeowners decided to stop paying their mortgage and live in the house rent-free for as long as possible. Since the banks were offering no real solutions and since they were taking so long to consider a short sale, frustrated borrowers made a pragmatic choice to save up their money while living for free in their own home. Some people were able to stay for a few years before being foreclosed. While some borrowers felt they had no other choice, others derived some satisfaction in sticking it to the banks.
Another challenge for the banks (that they helped to create) was that many real estate agents did not want to work on short sales, particularly because the lenders were cutting commission. Real estate agents know that short sales involve more work and more risk because of the high probability of not selling the property. Lenders were exacerbating the problem because they were cutting commissions. So agents were doing more work, with more risk, for ultimately less money. Without the cooperation of agents, many short sales failed or never reached the settlement table. Lenders needed to find a way to incentivize agents, or at the very least, avoid demoralizing the professionals who make sales happen.