The homeowner has not paid her loan payments in months and the bank agrees to a "short-sale" (where the home is sold for less than the amount of the loan). An offer comes in close to the short-sale asking price. Yet the bank refuses to approve the sale. Months go by. The owner is still in the home. She is still not paying on her loan, and the bank still refuses to approve the sale.
It doesn't make sense! After all, something is better than nothing, right? Why doesn't the bank approve the sale, take whatever cash they can get, and move on?
It all comes down to accounting. If the bank accepts the short-sale, they have agreed to settle the owner's debt for less than the full loan amount. And this loss has to be recorded in the bank's balance sheet.
But if they never agree to the sale, then there is no loss. In fact, the full loan amount still shows as an asset on their books, making the bank look financially very strong.
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