One of the popular conservative memes is to fulminate that lots of Americans have been living “rent free” in homes slotted for foreclosure, taking advantage of the fact that court dockets are crowded. This talking point is untrue on multiple levels. First, the delay in foreclosure is due to servicers gaming the system. Attenuated foreclosures allow servicers to suck more of the value of the properties away from investors to themselves by continuing to charge late and various “junk” fees, which will be recouped when the home is finally sold. In Florida, one of the ground zeros of foreclosures, it is overwhelmingly the banks, not borrower attorneys, who are putting off foreclosures. Second, borrowers not living cost-free in the homes; are maintaining the properties and liable for property taxes. Third, it is not a party to live in a home with the uncertainty of eviction hanging over your head.
An important Reuters piece documents the flip side of this picture: what happens when the servicer starts foreclosure but keeps the property in limbo-land, and the homeowner has decamped, on the mistaken assumption that foreclosure was imminent? The Reuters tag phrase for this syndrome, “zombie title” doesn’t begin to do justice to the horrorshow that borrowers experience. Consider: a stressed borrower leaves the home, thinking that the bank will take it, so he pays moving expenses and is renting somewhere else. In reality, the bank is continuing to rack up more and more mortgage payments and related fees, and his local city/town is not only continuing to assess property taxes, but may also fine him for abandonment of the property.
The knock-on consequences can be devastating. They show in fact that borrowers who do not stay in place until a bank forecloses are committing economic suicide. And the article by Reuters reporter Michelle Conlin makes clear this is not a trivial number of homes. Of 10 million homes where the banks have started foreclosure in the wake of the crisis, roughly 2 million in limbo. She writes:
Six years in, thousands of homeowners are finding themselves legally liable for houses they didn’t know they still owned after banks decided it wasn’t worth their while to complete foreclosures on them. With impunity, banks have been walking away from foreclosures much the way some homeowners walked away from their mortgages when the housing market first crashed…
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….
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.
The story leads off with the case of Joseph Keller, who with his wife left his home five years ago, which was a few weeks before Chase sent him a notice of an impending foreclosure sale. But the bank cancelled the sale, leaving Keller even worse off:
First, in 2010, the county sued Keller because the house, already picked clean by scavengers, was in a shambles, its hanging gutters and collapsed garage in violation of local housing code. Then the tax collector started sending Keller notices about mounting back taxes, sewer fees and bills for weed and waste removal. And last year, Chase’s debt collector began pressing Keller to pay his mortgage, which had swollen, with penalties and fees, from $62,100.27 to $84,194.69.
The worst news came last January, when the Social Security Administration rejected Keller’s application for disability benefits; the “asset” on Avondale Avenue rendered him ineligible. Keller’s medical problems include advanced liver disease, hepatitis C and inactive tuberculosis. Without disability coverage, he can’t get the liver transplant he needs to stay alive.
And others in his situation face similar financial pain:
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.
And it is not as if the borrowers had any way of knowing about the bank volte face:
No regulations require that banks let homeowners know when they change their minds about a foreclosure. So they rarely do, according to housing court judges, homeowners’ lawyers and academics who study foreclosure problems. “The banks do not answer inquiries, they do not answer phone calls, they do not answer letters,” says Judge Patrick Carney of the Buffalo, New York, Housing Court. His zombie-title caseload has swollen in the past few years to well into the hundreds. “The whole situation is surreal,” he says.
And of course, the banks come out ahead:
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..
Banks say that because they are not the legal owners of these homes, they aren’t required to maintain them, pay taxes on them, or take any legal responsibility for them. Homeowners legally own their properties until the day of sale. And it’s not until that day, the banks point out, that a homeowner’s name vanishes from the title.
I strongly suggest you read the article in full. Conlin provides grim and compelling examples of how much damage this abusive practice inflicts. Please send her report along to your Congressman with a suitably irate cover note. Rectifying this abuse needs to become a top priority of the Consumer Finance Protection Bureau.