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Zombie foreclosures terrorize ex-homeowners

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When people move out after receiving a notice of a planned foreclosure sale and the bank then cancels, municipalities are left to deal with the mess. Some spend public funds on securing, cleaning and stabilizing houses that generate no tax revenue. Others let the houses rot. In at least three states in recent months, houses abandoned by owners and banks alike have exploded because the gas was never shut off.

THREAT OF JAIL

Unsuspecting homeowners have had their wages garnished, their credit destroyed and their tax refunds seized. They've opened their mail to find bills for back taxes, graffiti-scrubbing services, demolition crews, trash removal, gutter repair, exterior cleaning and lawn clipping. At their front doors they've encountered bailiffs brandishing summonses to appear in court.

In some cities, people with zombie titles can be sentenced to probation - with the threat of jail if they don't bring their houses into compliance.

"These people have become like indentured serfs, with all of the responsibilities for the properties but none of the rights," says retired Cleveland-Marshall College of Law Professor Kermit Lind.

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.

By walking away, banks can at least reap the insurance, tax and accounting benefits from documenting the loss — without having to take on any of the costs and responsibilities of ownership, according to a 2010 Federal Reserve paper. A walk-away also enables them to "sell the unpaid debt to debt collectors, sometimes noting to the court that the loan has been charged off," according to a Case Western Reserve University study released in 2011.

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