Are real estate lenders or borrowers irrational?

It has been a busy week for our real estate business. I finally pulled together all the short sale offers for 3 different properties and have faxed the offers to the 3 banks. Each proposal has about 25 pages of documentation. The banks tell me it may take 30-45 days for them to respond. Fortunately, it takes forever to foreclose in New York, so there is no pressure of an upcoming auction to worry about at the moment. I basically used the format prescribed here - Creating a Successful Short Sale Package, but have had conversations with Don DeRosa as well during the week. He has been enormously helpful.

After working on pre-foreclosures for just a few weeks I have a few observations and a question- What the heck are these lenders thinking?

• Lenders seem willing to pile on second and third mortgages without a clue as to how much the property is worth. These second and third positions are essentially worthless when the first is foreclosing. Some national lendors may think that property values are appreciating rapidly everywhere, but local lenders should know better. Buffalo NY real estate is not known for rapid price increases (the opposite is happening in most of the neighborhoods that I have worked).
• Is there a lot of appraisal fraud that is going on? This seems especially prevalent in the poorer areas of Buffalo. Houses in poor condition are getting loans twice their after repaired value. The homeowners take the money and spend it without improving the property. I have yet to meet a conventional lender that will lend me more than "as is" value for a property, yet the inner city houses in a state of disrepair seem to get more cash than the property is worth.
• Some of the lenders in junior positions weren't even aware that the senior loan was foreclosing.
• ARM's are killing people. Most bought houses at the max payment they could stand and as the interest rate adjustment kicks in they have a hard time adjusting. Cities increase their tax assessments after the owners buy the house at inflated prices and then the bank forces a "catch-up" period of very high escrow payments that are too burdensome for the homeowner. Get a fixed rate mortgage.
  
• Banks must see that charging 11% interest rate for second mortgages justifies the higher foreclosure rate. I guess the math must work for them. For an investment property a high interest rate works since I will flip the property, but for a homeowner, borrowing at 11% seems too risky. Save some money for a down payment before indulging on a home.
  

Every one of the proposals I submitted was to a lender that will lose everything when the first forecloses. Will they accept my proposals? I don't know. However, because of my relationship with the buyers, I know there won't be any other buyers until the auction, so it's me or nothing.

Meanwhile, we looked at some properties through Realtors. We made one offer last week and will make another this week. We are working towards our goals methodically and consistently and I expect we will meet them.