In today’s real estate market there are still homeowners who are “Underwater” on their homes. When we say underwater, we mean that they owe more on their home than the home is worth due to declining prices since they purchased the home. So if they get into any financial hardship that would affect their ability to make their monthly mortgage payment (like losing a job), they don’t have many options other than to lose their home to foreclosure. If they have enough equity in their house, they can simply put the house on the market and sell it, but if they are underwater, they have no equity and the market will not give them what they need in order to pay off of their loan.
The bank has to foreclose on loans that are not current and making their payments or they will go out of business. The problem for banks is that the foreclosure process can be quite expensive for them on an asset that they are already losing money on. Banks make their money on these loans by collecting interest monthly. When they are not getting their monthly payments, the banks are losing money, and the foreclosure process can take a long time to complete legally; that time costs them money in this way as well. Not to mention that when a home goes into foreclosure, the owners usually move out and leave the home vacant, and vacant homes can become costly to the bank as well, with break-ins, vandalism, pipes freezing and bursting causing damage to the house etc. These are all costs that the bank is going to have to pay to get the property in any sort of condition to put on the market and then sell so that they can get the house off of their books, thus freeing up whatever money is left so that they can put that money back to work making interest for them on another loan.
So short selling a house can in some cases be a better alternative to foreclosure to banks.