The Zombie Foreclosure Problem

Source: Alan Levine / License

The housing crisis that launched the 2008 recession had a dramatic scope and effect. As 2015 draws to a close, many of the negative consequences of the United States' housing bubble have only just begun to be ameliorated, in large part due to rising housing prices. One particular problem, so-called "zombie properties," has followed the national pattern: a nationwide return to average rates with a few troubling local markets still affected by the issue.

Zombie properties begin with a “zombie foreclosure,” a term which is used to describe what happens when homeowners leave a property undergoing foreclosure before a lender actually obtains control over the property. When the lender then cancels or delays the foreclosure, which can happen for a variety of reasons, the property is left vacant, and its title remains in the homeowner's name. These vacant properties are the “zombies,” and their existence has been a blight on neighborhoods across the country. Luckily, educated homeowners can largely avoid these problems, and housing policy experts have been hard at work developing ways to stem the negative effects of zombie properties in parts of the country where they remain a problem.

How Zombie Foreclosures Work

When homeowners receive a notice of foreclosure, their first impulse is often to move out. However, in many states, the foreclosure process moves incredibly slowly, both due to increasingly complex legal issues and banker malfeasance. For example, several states have enacted stricter rules on lenders, forcing them to produce paperwork that may have been lost or inaccurately created. Furthermore, many lenders had very little interest in taking over properties located in housing markets in economically challenged areas, instead choosing to write off the loss. As a result, the property is left vacant. The once and present homeowner to whom the property is still titled remains responsible for numerous issues, including property taxes, while the surrounding neighborhood suffers the ill effects of a neglected and empty property.

The Consequences of Zombie Properties

A homeowner that leaves a property before the foreclosure is complete can face significant problems. Lenders who have written off a property may sell the unpaid balance of the mortgage to a debt specialist, who will pursue the former homeowners with considerable vigor. Housing associations and municipal housing authorities can levy fines. In some areas, violations of property codes can result in incarceration. Credit agencies will continue penalizing former homeowners, while cities will bill them for any maintenance, including the cost of boarding up empty houses or painting over graffiti.

Meanwhile, the community in which a zombie property is located is also affected. An ugly vacant home will drive down prices for the entire area, causing widespread financial damage. Meanwhile, a vacant property has been shown to attract crime, including squatting and vandalism. One study of zombie properties in Chicago found additional concerning effects, including the fact that these properties were far more likely to appear in areas with low incomes and in neighborhoods with a high rate of minority residents.

Zombie Properties Today

As with the distinction between judicial and non-judicial foreclosures, distinctions must be drawn between the national picture of zombie foreclosures and regional variances. In many respects, the zombie property crisis is over. At the peak of the housing crisis, there were more than 300,000 zombies in neighborhoods across the country. However, the real estate experts at RealtyTrac have estimated that 20,050 such properties exist as of the third quarter of 2015. The significant decline in these zombies - a 43% reduction since the third quarter of 2014 - is attributed to numerous factors, including streamlined legal proceedings and rising housing prices.

Despite these improvements, some cities and states are still facing serious issues. For the most part, the states with the most zombie properties are those with judicial foreclosure systems that still remain clogged with unfinished business, including New Jersey, Florida, and New York. However, some analysts suggest that these numbers, which have risen even in cities such as Boston and St. Louis, are largely going up because banks have finally begun completing the foreclosure process, causing homeowners to move out and creating temporary zombies.

Zombie Property Fixes

Municipalities and states still have many options for correcting their problems with zombie properties. One of the most obvious options is to craft legislation that requires lenders to inform homeowners and other interested parties that a foreclosure has been halted or delayed. Cities can also use the tools they already have, ranging from building ordinances, anti-blight provisions, and other statutory powers that enable them to prevent zombie properties from bringing entire neighborhoods down with them.

Meanwhile, homeowners facing foreclosure simply need to keep one thing in mind: until the title of the property is transferred through a successful foreclosure, the property is theirs. It’s generally a good idea to continue occupying a property throughout the foreclosure process, especially since it’s technically "free" given that no further mortgage payments are expected. Borrowers should ideally work with their lender to refinance a loan or otherwise work out a payment schedule. However, in the absence of a workable solution, borrowers can save considerable money simply by remaining on the property until a foreclosure is finalized. As long as the title is in the borrowers’ name, they can remain legally liable for the property, which is another good reason to stay. 

A Brief Introduction to Foreclosures

Source: BasicGov / License

The collapse of subprime, mortgage-backed securities in 2008 led to a widespread foreclosure crisis brought on by what the media termed the “Great Recession.” Today, the repercussions of the crisis continue to be felt in courtrooms across the country even as the economy has largely recovered. As result, people around the nation have received a crash course in foreclosure law. Homeowners owe it to themselves to become familiar with their state's mortgage laws, a process that can often be daunting.

The History of Foreclosure

Foreclosure law arose long after mortgages became common. Legal scholars have argued that virtually every developed society in history has had some form of a mortgage. In medieval England, mortgages were originally designed under what is known as the strict title theory, which directed profit and rent to the landowner without interest to avoid violating usury laws. It was only in the 1500s that charging interest became socially and legally acceptable. Moreover, mortgagees had few rights until the 1600s, when the principle of "equity of redemption" made it possible for mortgagees who had missed payments to regain the rights to their property by meeting their debt obligations.

Foreclosures themselves only arose in the 1800s, as English courts began limiting equity of redemption by imposing restrictions on the amount of time a borrower had to repay their mortgage debt. By the mid-19th century, foreclosures were developed as a way for lenders to ask the court to set specific dates for repayment prior to allowing property rights to revert back to the mortgagor. However, American independence led to American jurisprudence, and while several efforts were made in the 20th and 21st centuries to create a federal standard for mortgage laws, the current legal landscape is one in which each state retains its own legal process for foreclosure.

The Foreclosure Process

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While all 50 states have different foreclosure statutes, foreclosures in the United States can generally be grouped into three different processes. The most common, “judicial foreclosure,” is available in all states, although some make it the primary method. In this process, a failure to pay leads courts to take over the property and sell it in a public auction. In several states, mortgages may include "power of sale" clauses in which mortgagors oversee auctions instead of the courts, a convenience that often saves considerable time. The third type of foreclosure, “strict foreclosure,” is used in fewer states and occurs when mortgagees owe more money than the property is worth. In a strict foreclosure, the mortgagor sues the mortgagee to set a timeline for repayment, with the mortgagor recovering the property rights immediately upon failure to repay rather than requiring an auction.

Foreclosure processes vary by state and cover aspects such as how long borrowers have before they receive notice or become subject to eviction, as well as a variety of other issues. In many respects, the processes look very similar. Mortgagors can begin foreclosure proceedings between three and six months following the last payment, after which time mortgagees receive a formal notice and a final timeline for repayment. In many states, debt repayment remains an option until the auction, although some states offer a limited redemption period after this point.

How to Avoid Foreclosure

In many respects, the easiest way to avoid foreclosure is to avoid taking on a mortgage that cannot be repaid. However, for many Americans, the loss of a job or a medical emergency might turn an affordable mortgage into an enormous financial burden. As soon as you miss your first mortgage payment, it becomes vital to seek out assistance. Many mortgagors and lenders are eager to avoid foreclosure, and working with them is vital. Arrangements can be made for repayment in many circumstances. Furthermore, the U.S. Department of Housing and Urban Development offers the assistance of housing counselors who can provide state-specific advice and help mortgagees avoid being scammed by financial services companies that prey on those in foreclosure.

Luckily, mortgagees across the nation have received numerous legal benefits thanks to legislators who have responded to the mortgage crisis of 2008. A wide variety of new laws were enacted to prevent lender abuse, encourage mediation rather than civil suits, and create new opportunities for loan modifications. One federal program, the Hardest Hit Fund, or HHF, offers financial assistance to those facing foreclosure, while other nationwide laws like the Mortgage Assistance Relief Services (MARS) protect mortgagees from deceptive practices through a variety of reforms and rules for companies offering foreclosure rescue services. Many states have also introduced stringent "ability to pay" rules to prevent lenders from entering into mortgage agreements with those who are unable to afford payments.