Short-Sale Lunacy!

Why do real estate agents hate short sales? Here’s a recent true experience that I just went through with one of my buyers.
In early January my buyer made a very reasonable offer on a San Jose condominium that had been on the market a few months as a short sale. The sellers had to re-locate and had purchased the unit two years before for $570,000. The lenders (yes, there were two lenders involved here) had agreed to a first mortgage of $439,000 and a second mortgage of $130,000. Essentially the sellers had purchased the property for $1000 down plus whatever closing costs they incurred. They had little “skin in the game”. Now the property needed to be sold and the market value was approximately $400,000- a 30% decline!
There were two units available at the time my buyer wrote their offer. The first unit was the one described above which had rough paint, needed new carpets but did possess some nice wood flooring. The second was identical in layout but was move-in ready with nicer paint and clean carpets but only one room of Pergo flooring. They were priced identically. Both were short sales.
Fourteen weeks after we entered contract on the first property, we had yet to receive a price approval from the lenders. The second unit was by then in contract at $375,000 and we had offered $379,000 on our unit. The first lender had given a verbal approval of our offered price (it had appraised and the market seemed to be saying that it was a fair price) and had agreed to provide $3,000 as complete remuneration to the second lender (remember, the second lender is holding a $130,000 note). The second lender wanted 10% or $13,000 but was negotiated down to a range of $5000 to $9000. There was also $1600 of back HOA dues that the first lender did not want to pay even though the purchase contract stipulated that the sale was to be free and clear of all liens.
After a little more negotiation between the lenders, the first lender abruptly closed their file and effectively cancelled the sale due to non-approval of the purchase price! The home will now go to foreclosure. The second lender will get nothing, the poor sellers are back on the roller-coaster with a good chance that their credit is now ruined for at least 7 years, and my buyers are still without a home. All for somewhere between $3600 and $7600 that the first lender wouldn’t even try to negotiate with my clients. To better put that in perspective, it will likely take three months minimum to get the property foreclosed and at least another month or two to get it sold. That means that four to six more months of HOA dues ($800 minimum) will be in arrears, all the responsibility of the first lender in a foreclosure sale. In addition, the first lender will lose at least another four months of mortgage payments on their $439,000 loan ($10,560). Lastly, the property will likely not sell for the same amount in foreclosure as my buyers were willing to pay today. In summary, two lenders will lose AT LEAST $11,360 and $3000 respectively or DOUBLE what they were unable to agree upon when they had a solid buyer.
The logic here escapes me! When you find yourself in a hole, the first rule is to stop digging! Someone needs to remind these lenders of that maxim! But I can’t worry about that or about the difficulties lenders find themselves in; I have to locate another home for my clients.