The Consumer Financial Protection Bureau is starting to scrutinize mortgage servicers’ practice of starting foreclosures and then walking away from them, leaving homeowners who may already have vacated the property on the hook for mortgage debt, taxes and maintenance, National Mortgage News reported March 12.
The CFPB has termed these incomplete transactions “zombie foreclosures.”
Currently, hundreds of thousands of homes exist in a state of zombie foreclosure, which typically involve low-value properties where a bank or servicer has decided that the cost to repair a home is more than the property is worth.
“There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about,” Laurie Maggiano, CFPB servicing and secondary markets program manager, said March 11 at a conference sponsored by the Federal Reserve Bank of Cleveland, National Mortgage News reported.
Many servicers have failed to comply with disclosure requirements to borrowers and anti-blight provisions that require banks to release the lien on a property or complete a foreclosure rather than leave a property in limbo. When a bank fails to complete a foreclosure, the borrower remains responsible for the debt, taxes and maintenance of the property.
While banks typically provide multiple notifications to borrowers advising them that their property is going into foreclosure, many do not notify borrowers when the foreclosure stalls. Additionally, servicers are not required to communicate with borrowers about lien releases or charge-offs, but the Truth in Lending Act does require them to send statements every month to borrowers who have liability for delinquent mortgage debt.
Peter Skillern, executive director of the nonprofit Reinvestment Partners, told National Mortgage News, “They are pushing the borrower out of the home, which results in abandonment. Servicers need to make sure they are accurately communicating the status of the foreclosure process to the borrower.”
Daren Blomquist, senior vice president at analytics firm RealtyTrac, told National Mortgage News that there are approximately 152,000 vacant or abandoned homes nationwide where servicers have not taken title. These properties make up about 22 percent of the 676,000 bank-owned homes that are not listed for sale. Not included in the total are the 740,000 properties currently in process of foreclosure.
National Mortgage News reported that Chicago; Dayton, Ohio; and Philadelphia have the highest numbers of zombie foreclosures.
Maggiano noted several ways the zombie foreclosure situation can be addressed, including agreeing on a national definition of “abandonment,” speeding up the foreclosure process and creating a national registry of zombie foreclosures.
Frank Ford, senior policy advisor with the Thriving Communities Institute, an organization that helps revitalize Ohio urban centers, told the same conference that the nation’s four largest banks should not be allowed to receive credit under the national mortgage settlement for dumping these homes.
“It would be a tragedy that a bank that was held accountable for a major settlement ends up getting credit for properties that they dumped and might now be vacant, tax delinquent, condemned or demolished,” Ford said, National Mortgage News reported.