WHAT IS A ZOMBIE FORECLOSURE
Have you ever noticed how many television shows there are about zombies? Zombies in real estate? No, this isn’t the latest television show, with undead agents showing real estate. What we are addressing are “zombie foreclosures.”
A “zombie foreclosure” is a term used to describe properties that have been vacated by their owners once the foreclosure process has commenced. However, sometimes the foreclosure process is never completed. Essentially those who don’t realize they still own their homes are left responsible for mortgage debt, taxes and upkeep.
These vacated properties can become eyesores and drive down the property values. They also take a big chunk out of local government revenue in the form of unpaid taxes. It’s estimated that more than $400 million in property tax revenue is likely delinquent due to zombie foreclosures.
Zombie foreclosures are generally low-value properties that weren’t worth the banks’ time to foreclose on. Rather, some banks charge the houses off. Some banks walk away from foreclosures much the way some homeowners walked away from their mortgage when the housing market crashed.
There have been 10 million homes placed in foreclosure since 2006. This number, in more stable times would have taken 20 years to reach. Of those, 2 million never come out of foreclosure. Others have been caught up in what is known as the robo-signing scandal when banks spun out fraudulent documents to foreclose quickly. The rest are zombie foreclosures.
Florida has the highest number of zombie foreclosures followed by New York, New Jersey, Illinois and Ohio. Most of these states have seen an increase in new foreclosure activity over the past year, creating a more fertile breeding ground of zombie foreclosures.
Some states such as Florida and Illinois are trying to combat zombie foreclosures by weighing legislation that could help fast track foreclosures and move the abandoned properties through the system quickly. New York is another state considering legislation that would make lenders responsible for the upkeep of zombie foreclosures, allowing government officials to rehab properties or demolish them.
Technically banks and servicers aren’t required to communicate with borrowers about lien releases or charge-offs, however, an obscure provision of the Truth-in-Lending Act requires that servicers send statements each month to the borrowers who have liability for delinquent mortgage debt. According to the Consumer Financial Protection Bureau, that provision is pushing banks and servicers to release the borrower from liability of the debt.
The CFPB is looking very closely at abandoned properties and zombie foreclosures. They state there is direct borrower harm if a borrower believes their property has been foreclosed on and they are no longer responsible. After months, sometimes years later, they find out there was never a foreclosure and they have to pay thousands of dollars of mortgage debt, code violations, and municipal services.
The CFPB said it has ideas to help resolve the problem such as creating a national definition of “abandonment”, hastening the foreclosure process so vacant homes can more quickly be transferred to potential owners.
Like undead zombies, zombie foreclosures will be difficult to get rid of. The majority of these abandoned homes are encumbered by liens and in various stages of deterioration. Legislation will be needed to release the liens so titles can be transferred.