Homeowners think that when they receive a notice of foreclosure from their bank, it's time to move out. But sometimes banks unexpectedly dismiss the foreclosure, and the home's title remains in the name of the owner who thought he or she had lost the property.
Homeowners who aren't aware of this practice can find themselves the holders of so-called "zombie titles." A regular title becomes a zombie title when a homeowner finds himself or herself being mindlessly pursued by mortgage servicers, local governments and debt collectors for bills related to a home she thought she no longer owned. If you're facing foreclosure, here's what you need to know to avoid this problem.
The Bank May Never Complete Your Foreclosure
"If your lender is in the process of foreclosing on you, do not assume that your lender will follow through with the foreclosure until it is final," says John H. Corcoran, an attorney with the Corcoran Law Firm in the San Francisco Bay Area.
"For a variety of reasons, lenders may hold off on completing a foreclosure because they simply don't want the house back, or because they have too much inventory on their hands, or because the costs of foreclosing do not justify completing the foreclosure," he says.
"It may seem counterintuitive, but banks are not obligated to foreclose and take legal title to a property if they feel the loss or potential liability is too great," says Allan S. Glass, president of ASG Real Estate, a Los Angeles firm that has served bank and investment clients handling distressed assets and foreclosures since the early 1990s.
"If the property falls into severe disrepair, becomes occupied by rogue tenants or becomes cited for excessive abatement by a municipality, the bank could decide to charge off the debt and walk away," he says. The likelihood of these problems increases the longer a property hangs in limbo, he adds.
What's more, the bank may not tell the homeowner it has stopped moving forward with the foreclosure or canceled it altogether. The bank may not attempt to notify the homeowner because it isn't legally required to. Even if it does try to notify the homeowner, it may not be able to locate a homeowner who has moved out and has new contact information.
Your Name Remains on the Title until the House Is Sold
"Just because you moved out of a house doesn't mean you automatically stop owning it, any more than you would cease owning a car you left parked by the side of the road," says Corcoran.
The house remains yours until someone else's name is on the title. This change of ownership often happens after the bank sells your home at a foreclosure auction, but if the foreclosure process stops, your home won't make it to auction.
"It's extraordinarily important to understand you can't just walk away and expect the problems to resolve themselves. Homeowners must see the foreclosure process to completion," says Glass. He adds that even if a large amount of time has passed since getting the initial foreclosure notice, it doesn't make the problem or responsibility go away.
Local Governments May Hold You Liable for Maintenance, Repairs and Property Taxes
After you vacate your home, the best-case scenario if it remains empty is that it gradually falls into disrepair and becomes an eyesore for your former neighbors. The worst-case scenario is that it is damaged and vandalized by criminals and you are held responsible for the damage. If your property violates local housing codes or ordinances, you could find yourself on the hook for those violations.
"Many homeowners leave their homes during the foreclosure process assuming they are doing the honorable and morally right thing," says Glass. "The unfortunate risks they assume are that someone takes possession of their home, damages the home causing additional loss, or that the house lingers in disrepair until it becomes a nuisance to their neighbors and city. All of these things could lead to a greater loss financially for the homeowner, or worse yet potential legal liability," he says.
If you don't respond to the initial notices - which is likely if you no longer live at the property - you may one day receive an unexpected bill, have your tax refund garnished or even be sued by the county or municipality for the cost of any repairs the government made on your behalf. If the house falls into such disrepair that the city decides to demolish it, you could be on the hook for a bill ranging from $10,000 to $30,000.
"As long as you continue to own a home, you can continue to incur liability, including penalties and fees, and taxes can continue to accrue. It's all in your name until you sell it or you are foreclosed upon by a lender," Corcoran says.
The Bank May Not Take Your House Even if You Try to Give It Back
Glass says homeowners don't have to wait to be foreclosed upon. They can work with a reputable real estate professional to try to get the bank to agree to a deed or short sale in lieu of a foreclosure. They can also try doing a loan modification. Banks, however, are under no obligation to agree to any of these offers.
The Bottom Line
Zombie titles can truly be a nightmare for distressed homeowners. Understanding how the foreclosure process normally works - and how it dysfunctions in today's market - will help you avoid becoming a victim.