The walking dead haunt the land of real estate finance. A “zombie mortgage” is an abandoned property with a mortgage in the midst of foreclosure. The house sits in limbo, at best continuing to deteriorate because of lack of repairs; at worst, vandalized, trashed, used for illegal activities, and being a drag on the neighborhood.
Recognizing the potential negative impact of these foreclosures, some states have tried to fight the zombies by expediting the foreclosure process for vacant properties and requiring mortgage servicers to maintain these properties. This is part of a bigger conversation on the costs of long foreclosure timelines versus the benefits of more borrower-friendly foreclosure processes. To have this conversation, policymakers must reduce the emotion in this discussion and carefully balance the economic and other interests of borrowers, communities, mortgage servicers, states, and municipalities.
How big is this problem?
The delinquency survey conducted by the Mortgage Bankers Association indicates 1.64 percent of the homes in the United States are in some stage of foreclosure. The extent of the problem depends on the state. For example, 5.97 percent of homes in New Jersey and 4.96 percent of homes in New York are in foreclosure, versus 0.66 percent in California and 0.77 percent in Texas.
It is difficult to tell what percentage of these homes are vacant. Nevertheless, this issue has generated enough controversy that legislators are now involved.
It is no accident that public officials from New Jersey, New York, and Ohio—states with a judicial foreclosure process—have taken or introduced legislative action to combat the zombie foreclosure problem.
Judicial foreclosures move slowly because a court order is required, and the courts are backed up with so many foreclosures. According to recent estimates, the time from the last interest payment to liquidation is 43 months for homes in judicial states, compared with 30 months for homes in nonjudicial states such as California and Texas. During this long foreclosure process, the borrower often moves out, leaving the “zombie” to fend for itself.
Resolving zombie mortgages requires balancing the interests of borrowers, communities, mortgage servicers, and states and municipalities. And until we look at this issue in economic—not emotional—terms, we are not likely to strike the right balance.
All sides have reacted strongly to legislative action, reflecting continued unease and a lack of clarity about the proper division of responsibilities when the borrower is no longer paying the mortgage and a lack of basic facts about the costs of different choices.
- The servicers’ perspective: A successful mortgage modification, in which the borrower is brought current and makes lower monthly payments going forward, is always the best economic outcome for both borrower and servicer. If the borrower is not a candidate for modification, the servicer prefers to move the eviction process along quickly. When the borrower stops paying the mortgage, he or she often stops maintaining the property. Maintenance gets even more costly if the borrower moves out. Moreover, vandalism is an issue with vacant properties, and servicers can’t monitor every property every second. While fines for nonmaintenance may seem reasonable from a public policy perspective, even the best-intentioned servicers can’t always fulfill their maintenance responsibilities.
- The judicial state perspective: State and local governments in judicial states would argue that the longer judicial foreclosure process is justified because it better protects borrowers. That is, foreclosure should never occur until the borrower is given every opportunity to remain in the home. When the home is vacant, an expedited foreclosure process can be justified. However, vacant homes need to be maintained, and servicers have often shirked on this responsibility.
- The problem: It is costly to maintain a property during a long foreclosure process, and the property is often abandoned during the process. The servicer is the only party in a position to maintain a zombie property. And if the servicer does not maintain the property, costs accrue to the servicer and the entire community.
When a vacant property is going through foreclosure, the interests of the state and community and the interests of servicers are generally aligned. In this situation, the home should be maintained to avoid further deterioration and the foreclosure process expedited.
Interests are similarly aligned when a mortgage modification is clearly feasible. It is in the economic interest of the borrower, investor, and servicer to keep the borrower in the home, as liquidations are costly.
The challenge lies with borrowers who might not have the resources to make modified payments. How do we weigh the considerable costs of delay against the chance the borrower could remain in the home? We need to understand how much a longer timeline improves the eventual outcome and what the cost of the longer timeline is, and we need to quantify how much it is worth spending to keep that particular borrower in the home. In other words, we need more facts and research to make sound policy decisions.
Until we answer these economic questions, debating the responsibilities of the servicer versus the government will continue to frustrate both sides, and zombies will continue to haunt some communities.