Your lender loses much less in a short sale compared to a foreclosure. In a foreclosure, the bank recoups only a portion of the mortgage balance plus they incur significant property preservation costs (aka maintenance costs), legal fees, liquidation costs, additional “carrying costs”. The ‘net’ the bank receives after a foreclosure sale is divided into the total costs or ‘balance’ due which is now much higher than the original mortgage balance resulting in the Loss Severity Rate. This rate has climbed to 40% of more. Much higher than a short sale! The incentive for the lender is to avoid foreclosing on the premises as this process is both time-consuming and expensive. On average the foreclosure process takes a year to complete. Over this period the lender will have to retain an attorney to repossess the property. As you can imagine there are many legal hurdles to overcome which can cost the lender tens of thousands of dollars depending how on vigorously the homeowner defends themselves in court. If the bank agrees to a short sale, this expense can be avoided in its entirety. Further, the bank must pay taxes and insurance in order for the lender to protect its collateral, once the bank repossesses the home. The lender can save a substantial amount of money by agreeing to a short sale as opposed to foreclosing and carrying the expense of the home.