A zombie title is a real estate title that remains with a homeowner who mistakenly believes that the property has been lost to foreclosure and that the title has passed to the lender. Zombie titles occur when lenders initiate foreclosure proceedings and then unexpectedly dismiss them.
If the homeowner is unaware of a foreclosure dismissal, they will be left holding a zombie title. A lender may dismiss the foreclosure for various reasons, including a surplus of inventory or unjustifiable costs.
A zombie title can pose a significant financial risk to the homeowner who continues to be shown on the property title since they remain liable for property taxes and code violations.
Key Takeaways
- A zombie title remains with a homeowner when a foreclosure is dismissed, but the owner is unaware of the dismissal. The title remains with the homeowner unaware.
- The lender may choose not to take the title of the foreclosed property if the costs associated with selling the property (arising from unpaid taxes, liens, and penalties) or potential liabilities are too high, and may walk away.
- Zombie titles arise because a financial institution is under no obligation to take the legal title to a property in foreclosure and may not (or may be unable to) contact the homeowner if it dismisses the foreclosure.
Understanding Zombie Titles
Zombie titles are often the result of confusion among homeowners regarding foreclosure rules. A homeowner who has defaulted on a mortgage may abandon the property and move upon receiving a foreclosure notice from the lender. If the property is in disrepair and requires substantial outlay for repairs and unpaid taxes before it can be sold, the lender may choose not to take the title.
If the lender cancels or dismisses the foreclosure process, the homeowner is left with a zombie title.
Zombie titles arise for two main reasons:
- A lender or financial institution is under no obligation to take the legal title of a property in foreclosure, even if the homeowner has defaulted on the loan. If the costs of selling the property or potential liabilities are too high, the lender may walk away rather than take the title of the property.
- The lender is also not required to inform the homeowner if it has decided to dismiss the foreclosure. Even if the lender decides to inform the homeowner, it may lack the homeowner’s new address or contact information.
A homeowner in this situation will unknowingly still hold the title to the property, along with all the costs and responsibilities of owning a home, without any benefits. Ownership does not change until someone else’s name is on the title.
Recent Trends
The 2007-2008 mortgage lending crisis resulted in millions of homeowners facing foreclosure. While the majority of those foreclosures were carried through, many were left dangling in the process or unexpectedly dismissed, resulting in tens of thousands of homeowners unknowingly holding zombie titles in the years after the financial crisis. As the U.S. economy and housing market gradually strengthened, the number of zombie foreclosures began declining.
However, with inflation and interest rates increasing in 2022, vacancies again saw a rise. According to industry data, in the third quarter of 2022, around 1.3 million residential properties in the United States sat vacant, or 1.3% of all U.S. homes. Of approximately 270,500 homes in foreclosure during the third quarter of 2022, over 7,700, or 2.85%, was sitting empty as zombie foreclosures.
Financial Impact on Lenders and Homeowners
What are the financial implications for the lender? By walking away from such mortgages, banks can at least reap the insurance, tax, and accounting benefits arising from such losses. A lender may also sell the unpaid debt to debt collectors to recoup all or part of the loan.
While the financial impact of zombie titles on banks may be limited, they can lead to significant, and often catastrophic, financial problems for homeowners who thought they had moved on. A zombie title represents a double-whammy for a homeowner who is already financially stressed due to bankruptcy and may face a hefty bill for back taxes and code violations just as they are getting back on their feet financially.
An unoccupied home can easily fall into disrepair. Not only does the homeowner remain liable for property taxes, but they can also be held liable by the local government for maintenance and repairs on the property. If the house is derelict and has to be demolished, these costs have to be borne by the zombie title homeowner.
The homeowner also has to contend with problems arising from an abandoned property. These issues range from public nuisance issues, such as pest infestations or criminal activity, to complications from illegal squatters or adverse possession.
Neighborhood Effects
Abandoned properties have a negative impact on the value of other houses in the neighborhood. Complaints from neighbors and area residents about abandoned and neglected houses often force local municipalities to step in and perform basic maintenance like trimming overgrown yards or trash removal since neither the lender nor the absentee homeowner will take responsibility.
The costs of such third-party maintenance, and penalties for code violations, can mount up over time. If those costs are left unpaid, the homeowner could incur penalties and fees, and even face legal action. Additionally, holders of zombie titles may have their wages and tax refunds garnished and their credit destroyed, resulting in more financial trouble in the future. Many homeowners do not realize they hold zombie titles until they find themselves being pursued by mortgage servicers, debt collectors, and local governments.
Buyers who unwittingly buy homes with zombie titles can also be left in legal limbo, as the previous homeowner may be unable to transfer the title to the buyer due to liens on the property arising from unpaid taxes and penalties. Caveat emptor should be the guiding principle before buying a house—the biggest purchase decision for most people.
Some real estate professionals advise that the homeowner’s only recourse is to continue staying in the home through the foreclosure process to keep it secure and well-maintained. Homeowners can protect themselves against zombie titles by seeing the foreclosure process through to completion and ensuring the title to their home legally transfers to another party.
Related Terms: Zombie Foreclosure, Lender, Foreclosure Dismissal, Property Taxes, Adverse Possession.
References
- Federal Reserve History. “Subprime Mortgage Crisis”.
- PR Newswire. “ZOMBIE PROPERTY COUNT INCHES UP AGAIN IN THIRD QUARTER OF 2022 ACROSS U.S. AMID CONTINUED RISE IN FORECLOSURE ACTIVITY”.
- Reuters. “Special Report: The latest foreclosure horror: the zombie title”.
