The rise of the zombie mortgage titles

Here is what happens if a bank decides not to go through with a foreclosure and the owner is stuck with a “zombie title“:

Since 2006, 10 million homes have fallen into foreclosure, according to RealtyTrac, a number that in earlier, more stable times would have taken nearly two decades to reach. Of those foreclosures, more than 2 million have never come out. Some may be occupied by owners who have been living gratis. Others have been caught up in what is now known as the robo-signing scandal, when banks spun out reams of fraudulent documents to foreclose quickly on as many homeowners as they could.

And then there are cases like the Kellers, in which homeowners moved out after receiving notice of a foreclosure sale, thinking they were leaving the house in bank hands. No national databases track zombie titles. But dozens of housing court judges, code enforcement officials, lawyers and other professionals involved in foreclosures across the country tell Reuters that these titles number in the many thousands, and that the problem is worsening…

Banks used to almost always follow through with foreclosures, either repossessing a house outright – known in industry parlance as REO, for real estate owned – or putting it up for auction at a sheriff’s sale. The bank sent a letter notifying the homeowner of an impending foreclosure sale, the homeowner moved out, the house was sold, and the bank applied the proceeds toward the unpaid portion of the original mortgage.

That has changed since the housing crash. Financial institutions have realized that following through on sales of decaying houses in markets swamped with foreclosures may not yield anything close to what is owed on them.

It would be fascinating to know exactly how many of these homes there are – and what the best solution to this issue might be. I remember the stories of homeowners who thought it was easier to simply walk away from their homes but it sounds like the banks have caught on and realized they might not make much from that situation either. It sounds like we need some guidelines to determine who is responsible for the home if no one, the homeowner, the lender, and perhaps even the community, doesn’t want it.

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