Why banks do short sales?

This cash reserves against any foreclosed properties can be anywhere between 2x the retail value of the real estate property to 10x the retail value of the real estate property. So, any time there is a real estate property in default, the bank has to put in cash reserves against the real estate property.

For example if the real estate property is worth $200k and the bank's policy is to put 6x the value of the real estate property in the cash reserves. That's already 1.2 million dollars that the bank cannot lend out. That cash reserves is the money sitting idle in the cash reserves account and the bank cannot do anything about it.

Naturally, the bank wants the ability to lend that cash out. The bank probably will not just have one foreclosed real estate property or one defaulted loan. Most banks have hundreds of defaulted loans at any one time. Hundreds of millions of dollars sitting idle in an untouchable account is not good for the bank. This immensely affects their lending ability. This gives the bank incentive to do short sales to free up the cash flow.

Reason #3 why banks do short sales - banks' borrowing ability

Just like any homeowners borrowing money from banks, banks borrow money from bigger banks. People need to have good credit to get a good bank loan or mortgage. So do banks. Banks need to have good financial books to be able to borrow from bigger banks and for better interest rates.

For example, if Bank A and Bank B both go to the big bank called Bank C to borrow money. Bank A has 10% foreclosure rates or 10% of Bank A's loans are in default. Bank B has only 2% foreclosure rate or only 2% of Bank B's loans are in default. Giant Bank C is more likely to lend to Bank B because of good track records of lending and making money, just like a bank would judge borrowers by their credit reports.

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