Delinquency rates on residential mortgages hover around 7%. It is widely expected that 4 million to 5 million mortgages will enter foreclosure over the next two years if nothing is done. In response, states and large servicers are enacting widespread foreclosure moratoriums to force lenders to negotiate with borrowers more aggressively.

Now, imagine for a moment that you are a lender. You can’t foreclose on delinquent borrowers, and your experience with loan modifications is that they re-default at a rate north of 50%. It is reasonable to expect that many of your modified borrowers that do re-default will seek bankruptcy to protect their homes from foreclosure. Bankruptcy judges have been increasingly granted more authority to modify loan terms, aka "cram down," the principal balance or interest rate to a level that the borrower can reasonably afford without your consent/approval. Quite the enigma – can’t liquidate, can’t renegotiate, and can’t wait forever.

There is, however, a foreclosure prevention alternative for borrowers that recognize staying in their home is no longer feasible and would like out with the least amount of harm to their credit and egos. The alternative is called a "short sale."

Wikipedia defines short sale this way:
In real estate, a short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. In 99% of all cases it is not a settlement-in-full.

Loss severity rates for lenders that successfully close a short sale vs. a REO sale are roughly half. Said differently, lenders lose half as much money on a short sale vs. a REO sale due to the additional carrying costs, repairs, deteriorating market values, and discounts applied to foreclosure sales.
Demand for REO properties is also under pressure with 80 percent of U.S. adults are now concerned with negative aspects of buying foreclosures, citing hidden costs, risky process, home losing value and personal connection with foreclosure as their core concerns. Buyers concerns can be overcome, but it seems the only cures are deepening price discounts. To the contrary, a traditional short sale is virtually identical to the standard buyer/seller protocol of standard real estate transactions - no stigma, no hidden costs, or undisclosed risks, and more stable prices.

The challenge for lenders is that short sales can take weeks, sometimes months, to get all affected parties (buyers, guarantors, lien holders, judgment holder) to agree on economic terms, i.e. who gets paid how much out of the proceeds of sale. Not many home buyers are that patient - particularly in a market with discounted new build and REO inventory competing for their attention and dollars. As a result, the fallout rate for short sales has traditionally been astronomically high - further contributing to the lack of adoption and standardization by participants.

Many of the challenges associated with successfully executing short sales can be overcome with a focused, systematic, and controlled process that expedites the vetting process for a purchase offers reasonableness, and legitimacy (no fraud/collusion between parties). The process should be managed by agents or entities that are delegated to conditionally accept offers on behalf of the lender once vetted. Trained negotiators armed with forensic due diligence acquired during the vetting process would interface with other stakeholders to solicit their conditional approval. Lines of communication and interfaces would be centralized and managed through this group/entity.