Zombie titles occur after a homeowner defaults, but when a lender never follows through with the foreclosure.
Although a mortgage loan servicer may notify a borrower in default that foreclosure proceedings have begun, the lender is under no obligation to continue with the process. When homeowners are given a foreclosure notice, many leave their properties because they believe they will be evicted.
During this time, however, the borrower in default is still liable for the property, even though he or she no longer lives there and is not aware of the fact that he or she still owns it.
Homeowners are legally liable for their home which means they are responsible for property maintenance costs, utilities, and taxes — all for properties they don’t realize they still legally own.
The start of zombie title issues became pronounced during the mortgage crisis. Roy Oppenheim, co-founder and partner of Oppenheim Law, said banks took shortcuts for underwriting, appraising, and securitizing.
“It was a crazy time,” he said. “They were securitizing loans faster than they were originating them.”
Tanya Marchiol, CEO of Team Investments, a real estate firm, said foreclosed homeowners cannot leave their house in shambles and expect the bank to pick up the pieces.
“It is your responsibility to know what is going on with your house,” she said. “The bank can cancel the foreclosure and never tell the homeowner.”
Borrowers must remember that their property is their responsibility until the title has changed hands into the banks.
“It is still your home until it is 150 percent foreclosed,” she said.
Zombie titles are not only harmful for mortgage loan borrowers, but for banks themselves, Oppenheim said.
“In order for banks to be strong, they need to have a strong real estate market,” he said.
The wave after the foreclosure crisis is still reverberating. According to a March 26, 2013 report by RealtyTrac, nearly 1.5 million U.S. properties are actively in the foreclosure process or bank-owned (REO) during Q1 2013. This rate peaked at 2.2 million in December 2010.
Oppenheim believes it will remain problematic for some time. His legal case load frequently deals with zombie titles. He said he currently has between 35 and 50 cases that are current or future zombie titles.
“Zombie titles will be a legacy issue for some time,” Oppenheim said.
Although they are frequent, zombie titles are preventable. One way is to avoid foreclosure entirely. Marchiol said distressed homeowners should short-sale their home instead of allowing the bank to foreclose on it. In the case of a short-sale, banks enlist real estate agents who oversee the home and ensure that it is maintained. In a foreclosure, there is no outside protection.
Oppenheim offered two additional preventative measures: one is to seek proper professional advice, and the second is to borrow home loans only from portfolio lenders. This type of lending company not only originates the mortgage loan, but it holds a portfolio of the loan instead of selling it in the secondary market.
“I don’t like the idea that my loan could be sold like a hot potato,” he said.
Real estate attorney Roy Oppenheim left Wall Street for Main Street, founding Oppenheim Law along ith his wife in 1989 in Fort Lauderdale, Florida, and is vice president of Weston Title and creator of the South Florida Law Blog, named the best business and technology blog by the South Florida Sun-Sentinel. Follow Roy on Twitter at @OpLaw or like Oppenheim Law on Facebook.