Here is a humorous take on a new pitfall in the ongoing effort to address the impact of foreclosures across our country.
The term "zombie foreclosure" describes a unique situation where a bank, upon foreclosing upon a homeowner, never proceeds to take ownership of a home. Normally, of course, after a bank forecloses they buy the property and then sells it
through an REO transaction.
That process works when a property has enough value to merit paying legal costs, the taxes due, and perhaps any staff time to oversee the sale. Unfortunately, in some cases those costs exceed the value of the house.
There is also the impact on a bank's balance sheet. JP MorganChase's method of keeping books, outlined on page 146 of their annual report this year, gives some insight into the value of the Zombie Approach.
"REO assets are those individual properties where the Firm receives the property in satisfaction of a debt (e.g. by taking legal title or physical possession). The Firm generally recognizes REO assets at the completion of the foreclosure process."
Given that situation, some banks are skipping out after foreclosure. In March, RealtyTrac said that there were slightly more than 300,000 homes stuck in zombie status across the country.
This leaves the borrower in a kind of limbo: the home remains in their name and the taxes remain their responsibility, even though they no longer can reside at the property.
The Greenlining Institute reflected on this video in a blog entry published yesterday.
Bank of America had until recently been the lender on one of the homes in this video. The bank made a loan to an investor who intended to rent the property. The investor never made a go of it and ultimately ceased to make his mortgage payments. B of A foreclosed, but after several years of vacancy, the bank still never completed the process of putting the home up for an REO sale. In lieu of that, B of A hired a Colorado sub-servicer to oversee the home.
Regulators are still catching up to this problem. There is a chance that the people overseeing the mortgage settlement will find a way to address the issue. Nonetheless, the zombie foreclosure remains in policy limbo.