Tuesday, October 27, 2015

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.