Zombie Mortgages – Don’t Let It Happen to You

What is a Zombie Mortgage?

Zombie mortgages occur when a bank notifies a homeowner that it is foreclosing; the homeowner vacates the property; but then the bank abandons the foreclosure without notifying the homeowner. This leaves the home in a state of limbo. No one lives there, but the homeowner technically still owns it.

Why Would a Bank Abandon a Foreclosure?

Owning and maintaining a property is expensive and time-consuming. The legal owner has to keep the house in good repair and pay property taxes. Reselling a property can also be costly, and, depending on the sale price, the bank could even lose money on the deal (if the outstanding loan is more than house sells for).

Zombie foreclosures are less common in places like Boulder, where home prices are relatively high and houses sell quickly. But in places like Detroit, where housing prices have not recovered, banks do not want the expense of owning and maintaining properties that they cannot sell. For this reason, the bank may send foreclosure notices as a matter of course but then never pursue the foreclosure because it is just not profitable.

Zombie mortgages can also happen if a homeowner cannot pay their mortgage and wants to voluntarily give the house to the bank in exchange for the bank forgiving their loan. (This is called a “deed in lieu of foreclosure.”) If the bank does not accept the deed in lieu of foreclosure, then the deed remains in the homeowner’s name and he is still responsible for the house and the mortgage, even if he has abandoned the property.

How Does Abandoning a Foreclosure Affect the Homeowner?

Homeowners who are being foreclosed may not be able to fight the foreclosure (usually because they don’t have the money), and so when they get the foreclosure notice, they simply abandon the house. But they still own the property until the bank completes the foreclosure process. As the legal owner, they must maintain the house and pay property taxes. And because the foreclosure was never completed, their mortgage is still alive. That means that even after abandoning the home, the owner is racking up thousands or tens of thousands of dollars in property taxes, fines, and mortgage interest, fees, and penalties.

How to Avoid a Zombie Mortgage

Keep yourself informed about the status of the foreclosure until you are sure it is complete and the deed has been transferred to the bank. You can search for the property status and request documents on the Boulder County Clerk & Recorder website at https://recorder.bouldercounty.org/countyweb/disclaimer.do.

If you want to use a deed in lieu of foreclosure, make sure that the bank is willing to accept the deed and that the deed has actually been transferred to avoid a zombie mortgage.

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