What Is a Zombie Mortgage?
In 2008, the bottom dropped out of the United States economy, leading to a recession that lasted years. Much of the recession was caused by an over-inflated sub-prime mortgage market. The banks and mortgage lenders, backed by investors willing to take inordinate risks, went bonkers giving out mortgages to borrowers who could not afford them. Many of these loans were considered "exotic." They went way beyond adjustable rates to no down payments, extended terms like 40 years, and high balloons to be paid or refinanced at the end of the term.
The Great Recession
As the Great Recession took hold, home prices began to drop. Almost overnight, it seems like homeowners, many of them who had not been in their new homes for more than a year or two, found themselves under water—owing more than their properties were worth. It was a bitter pill to swallow. Borrowers were struggling to service expensive loans that they could never hope to pay off.
And, many of these borrowers found themselves laid off from jobs or underemployed, exacerbating their already precarious positions.
The Underwater Homeowner Response
So, what were these homeowners to do? Many chose to do what seemed to be the only sensible thing. They walked away from their properties and their mortgages.
Only, it seems that those properties didn't just go away. Their owners, expecting that the bank or the mortgage company would start the foreclosure process promptly, learned sometimes months or even years later that the property had not in fact been foreclosed and they were still the record owner.
The Lender Response
It seems that a several of things were happening. First, so many people chose this route or just found themselves unable to make payments, the banks were faced with thousands of abandoned or nonperforming properties. They just couldn't get to them all in a timely manner.
Many of the properties had title and paperwork issues due to shoddy practices employed by law firms and title companies at the height of the mortgage lending bubble. Those issues would take time and money to sort out and correct.
Finally, many banks just didn't want to be saddled with undervalued properties, and they were unwilling to wait until the market would get better, having to throw good money after bad to pay taxes, homeowner association dues, upkeep, and other costs to maintain empty properties.
The Stakes for the Homeowner
So the banks just didn't foreclose. This left the properties in the name of the borrower, who remained responsible for that upkeep, the taxes, and the homeowner association dues. Often, these borrowers didn't learn of these mounting debts until years after they thought they had rid themselves of these burdens. Hence the name zombie mortgage or zombie foreclosure—because it never dies.
Imagine being hit with fines from the city for your failure to keep the grass cut on a house you moved out of months before. Or worse, since the property is still in the homeowner's name, the homeowner remains responsible for the property and any damage that occurs. Vandalism is rampant in neighborhoods with abandoned properties. In some cases, the homeowner can be held liable if the abandoned property causes damage to surrounding houses, such as the result of a fire. The homeowner could also be held liable for injury to anyone who is hurt on the property, including squatters.
To add insult to injury, if the property falls into such disrepair that the municipality decides to condemn it, the borrower could be stuck with the bill when it's demolished, a bill that Forbes estimates could be between $10,000 and $30,000.
Ten Years Later
It's now 10 years after that bottom dropped out. We're still contending with empty neighborhoods and exotic mortgages that survived the first wave but continue to fall. Home prices have still not recovered in some areas. And, now, interest rates are beginning to rise even as the real estate market cools.
What Homeowners Can Do
If you find yourself facing a zombie mortgage, all is not lost. You can't make the bank foreclose, but you can keep yourself informed of the process. If the bank isn't moving fast enough, find out why. Keep on top so that you know where you stand. You can also try these tactics.
Short Sale: You can put the property on the market, if it's clear to the bank that the bank will never be able to get enough out of a sale to cover what was owed, it may allow a short sale. That's when the bank lets you sell the property and not pay off the loan. The bank agrees to cancel the mortgage so that it doesn't encumber the property.
Deed in Lieu of Foreclosure: You can offer to sign the property over to the bank voluntarily by way of a deed in lieu of foreclosure. If the bank agrees to accept the deed in lieu, it can be the quickest and most effective way for you to get out from under. But you have to stay diligent and make sure the bank actually files the deed in your county land records. Otherwise, it will not be effective against third parties, including county taxing authorities.
Bankruptcy: Filing bankruptcy has met with limited success. In any type of bankruptcy but a Chapter 11 reorganization, it is difficult to force the lender to take title to the property. Chapter 11 is often too expensive for ordinarily middle-class borrowers to swing.
Seek Government Action: Zombie mortgages have been a huge problem for some communities. The properties lay abandoned and fallow, continuing to deteriorate. In some areas, entire neighborhoods have been reduced to ghost towns. To combat this trend, some municipalities and even state governments, like New York, have chosen to make lenders responsible for upkeep of properties even when the houses have not formally changed hands.
Some states, like Ohio and Maryland, are streamlining foreclosures to encourage lenders to fast track the process to prevent deterioration and get properties moving again. Some states and municipalities are passing regulations that discourage banks from boarding up properties, a sure sign of a blighted neighborhood. Some cities have even resorted to foreclosing on the properties themselves to gain control over properties before they fall into such disrepair that they have to be razed.
Ten years after the the mortgage market began to fail, we're still coping with the zombie mortgage phenomenon, and will continue to deal with it as long as these long-term mortgages remain, as long as property values remain suppressed, and as long as banks continue to ignore their obligation to prevent zombie mortgages from becoming a blight on the communities they serve.