Banks and other mortgage lenders have been contributing to the continued rise in foreclosures, including forclosed VA homes, because of their inability to process short sale applications in time to prevent foreclosures.

Short selling is the only option left for many owners of homes distressed because of job losses, medical problems or other recessionary conditions. Homeowners who can dispose of their distressed mortgages in short sales lose their houses, but they are able to preserve their credit scores at favorable levels. They also prevent themselves from going through the harsh emotional effects of foreclosure. In the future, when their financial conditions improve, they can apply again to buy their own homes

In addition, many banks and lenders also prefer short sales to real estate foreclosed houses, including forclosed VA homes, because they have found out that they lose only about 19 percent when undertaking short sales. They lose an average of 40 percent when units become foreclosed homes or forclosed VA homes.

So why are banks and other lenders not facilitating more short sales? The key answer to this question is the practice of securitization. In the past years, banks and lenders have been packaging mortgage loans into mortgage-backed securities and then selling them to investors. This practice lessens lenders’ risks and at the same time enables investors to earn from higher property prices in the housing market.

But while securitization has benefited banks and other lenders and has protected them from much of the losses that arose from foreclosed homes and forclosed VA homes, securitization has been blocking the completion of short sales.

Banks, which are not prepared for the consequences of repo properties and forclosed VA homes, have no financial incentive to pay additional staff to trace securitization documents and find the investors who hold the mortgages of properties being processed for short sales.

Dave Liniger, head of international real estate firm Re/Max, said banks have not been replying to the short sale requests of realtors simply because they do not have the staff to untangle securitization documents.

Based on research by Campbell Communications, only around 23 percent of applications for short sales are carried out. Three out of 4 short sale applications are not completed because the buyers can not wait for a very long time as the banks delay their responses.

Real estate analysts argue that the inability of lenders to complete short sale applications lead to more foreclosed homes and forclosed VA homes.