What is Zombie Foreclosure?

904 reads · Last updated: December 5, 2024

A zombie foreclosure occurs when a home is left vacant by homeowners who have defaulted on their mortgage and either incorrectly believes they have to immediately move out after receiving a foreclosure notice or choose to abandon the property for other reasons. More commonly, the former scenario where the owner mistakenly believes that the foreclosing lender is now responsible for the property, even though the homeowners still hold title to the property.For example, let's say a homeowner defaults on their mortgage and vacates their property, and the lender doesn't complete the foreclosure process, so the title is still held by the original homeowner. The property becomes unoccupied for an extended time, and the lawn, driveway, etc. is not taken care of. As a result, the state of the property falls into disrepair, creating safety concerns and resulting in an appearance that may lower property values in the surrounding community.

Definition

A zombie mortgage refers to a situation where a homeowner vacates their property due to default, mistakenly believing they must leave immediately upon receiving a foreclosure notice or choosing to abandon the property for other reasons. More commonly, the homeowner incorrectly assumes the mortgage lender is now responsible for the property, even though the homeowner still holds the title. For example, if a homeowner defaults and leaves their property, but the lender does not complete the foreclosure process, the title remains with the original owner. The property remains unoccupied for a significant period, with lawns, driveways, etc., left unmaintained, leading to deterioration, safety issues, and a decrease in surrounding property values.

Origin

The concept of zombie mortgages originated during the 2008 financial crisis when many homeowners, facing economic hardship, could no longer afford their mortgage payments. Due to the slow processing of foreclosures by banks and financial institutions, many properties were abandoned, creating the phenomenon of zombie mortgages.

Categories and Features

Zombie mortgages can be categorized into two types: voluntary abandonment by the homeowner and involuntary abandonment. Voluntary abandonment often results from a misunderstanding of legal procedures, while involuntary abandonment may occur because the lender fails to complete the foreclosure process promptly. Features of zombie mortgages include unoccupied properties, poor maintenance, and potential community safety issues.

Case Studies

A typical case is the city of Detroit following the 2008 financial crisis. Many homeowners abandoned their properties due to unemployment and economic pressure, leading to numerous zombie mortgages. These properties were left unoccupied, causing community deterioration and increased crime rates. Another case is certain areas in Florida, where after the real estate bubble burst, many properties were abandoned, creating large zones of zombie mortgages, affecting the local real estate market and community safety.

Common Issues

Investors dealing with zombie mortgages may face issues such as determining the legal status of the property, handling maintenance problems, and communicating with lenders to resolve title issues. A common misconception is that once the homeowner leaves, the lender automatically takes over the property, but in reality, the legal process can take a long time to complete.

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