The incentives in housing/mortgage system are so screwed up that there isn't one explanation for why banks seemed to prefer foreclosures to allowing short sales, though given that some are increasingly
embracing short sales I think one answer which doesn't get enough attention is that they are assholes. As in, their approach wasn't simply based on financial considerations but instead a desire to punish the moochers and freeloaders who forced the banks to lend them money to buy overpriced houses.
