What Is a Zombie Title?
A zombie title is a real estate title that remains with a homeowner who is mistakenly under the impression that the property has been lost to foreclosure and that, as a result, the title has passed to the lender. Zombie titles are the result of lenders initiating foreclosure proceedings by issuing a notice of foreclosure and then unexpectedly dismissing it.
If the homeowner is unaware of a foreclosure dismissal, they will be left holding a zombie title. A lender may decide to dismiss the foreclosure for a variety of reasons, including a surplus of inventory or unjustifiable costs.
A zombie title can pose a significant financial risk to the homeowner who continues to be shown on the property title, since they remain liable for property taxes and code violations.
- A zombie title is one that remains with a homeowner when a foreclosure is dismissed but the owner is unaware of the dismissal. Thus, the title remains with homeowner unawares.
- The lender may choose not to take title to the foreclosed property if the costs associated with selling the property (arising from unpaid taxes, liens and penalties) or potential liability are too high, and may walk away rather taking title.
- Zombie titles arise because a financial institution is under no obligation to take legal title to a property in foreclosure, and may not (or may be unable to) contact the homeowner if it dismisses the foreclosure.
Understanding Zombie Title
Zombie titles are often the result of confusion on the part of homeowners regarding foreclosure rules. A homeowner who has defaulted on a mortgage may abandon the property and move out upon receiving a foreclosure notice from the lender. The lender will assess the property prior to the foreclosure sale. If the property is in disrepair and needs a substantial outlay for repairs and unpaid taxes before it can be sold, the lender may choose to not take title, based on the premise that there is no point in throwing good money after bad. If the lender cancels or dismisses the foreclosure process, the homeowner is left with a zombie title.
Zombie titles arise for two reasons. Firstly, a lender or financial institution is under no obligation to take legal title to a property in foreclosure, even if the homeowner has defaulted on the loan. If the costs of selling the property or potential liability associated with the property are too high, the lender may walk away rather than taking title to the property. Secondly, the lender is also not required to let the homeowner know if it has decided to dismiss the foreclosure; even if the lender does decide to inform the homeowner, it may have not have an address or contact information for the homeowner who is now living elsewhere.
A homeowner in this situation will unknowingly still hold title to the property, along with all of the associated costs and responsibilities of owning a home, without any of the attendant benefits. Ownership does not change until someone else's name is on the title.
The 2007-2008 mortgage lending crisis resulted in millions of homeowners facing foreclosure. While the majority of those foreclosures were carried through, many were left dangling in the middle of the process or unexpectedly dismissed, resulting in tens of thousands of homeowners unknowingly holding zombie titles in the years after the financial crisis.
As the U.S. housing market gradually strengthened, the number of zombie foreclosures began declining. According to RealtyTrac, by the end of the second quarter of 2016, vacant zombie homes across the U.S. numbered just over 19,000, a 30% decrease from a year ago, and representing 4.7% of all residential properties in foreclosure.
According to property data provider ATTOM Data Solutions, of approximately 288,000 homes that were in the process of foreclosure during the fourth quarter of 2019, just over 8,500 or 2.96% were sitting empty as zombie foreclosures.
Financial Impact on Lenders and Homeowners
What are the financial implications for the lender? A Reuters report cites a 2010 Federal Reserve paper which states that by walking away from such mortgages, banks can at least reap the the insurance, tax and accounting benefits arising from such losses. A lender may also sell the unpaid debt to debt collectors to recoup all or part of the loan.
While the financial impact of zombie titles on deep-pocketed financial institutions may thus be limited, they can lead to significant, and often catastrophic, financial problems for homeowners who thought they had moved out and moved on. A zombie title represents a double-whammy for a homeowner who is already financially stressed due to bankruptcy, and may be faced with a hefty bill for back taxes and code violations just as they are getting back on their feet financially.
An unoccupied home, for example, can easily fall into disrepair. Not only does the homeowner remain liable for property taxes, but they can also be held liable by the local government for maintenance and repairs on the property. If the house is derelict and has to be demolished, these costs have to be borne by the zombie title homeowner.
The homeowner also has to contend with the host of problems that arise in connection with an abandoned property. These may range from public nuisance issues arising from the property developing pest infestations or being used for criminal activity, to complications arising from illegal squatters or adverse possession.
Abandoned properties also have a negative impact on the value of other houses in the neighborhood. Complaints from neighbors and area residents about abandoned and neglected houses often forces the local municipality to step in and perform basic maintenance such as trimming overgrown yards or trash removal, since neither the lender nor the absentee homeowner will take responsibility for the property's upkeep.
The costs of such third-party maintenance, and the penalties levied for code violations can mount up over time. If those costs are left unpaid, the homeowner could incur penalties and fees, and even face legal action. In addition, holders of zombie titles may have their wages and tax refunds garnished and their credit destroyed, resulting in more financial trouble in the future. Many homeowners do not realize they hold zombie titles until they find themselves being pursued by mortgage servicers, debt collectors and local governments.
Buyers who unwittingly buy homes with zombie titles can also be left in legal limbo, as the previous homeowner may be unable to transfer title to the buyer due liens on the property arising from unpaid taxes and penalties. Caveat emptor should be the main guiding principle before buying a house, the biggest purchase decision for most people.
Some real estate professionals advise that the homeowner's only recourse is to continue staying in the home through the foreclosure process, in order to keep it secure and well-maintained. In any case, homeowners can protect themselves against zombie titles by seeing the foreclosure process through to completion, as well as making sure that the title to their home legally transfers to another party.